bear-market-risk-9304312

Monday October 22: Five things the markets are talking about

Global equities remain better supported this Monday morning after Chinese stocks surged overnight on senior officials verbal intervention.

The ‘mighty’ U.S dollar has eased a tad along with treasuries, while Italian bonds have rallied.

The EUR had found some early support on the back of a ratings decision by Moody’s Investors Service late last Friday who removed the immediate threat of a downgrade to ‘junk.’ The market now awaits on S&P’s review this Friday.

Nevertheless, risks remain, from tension surrounding the Khashoggi murder and the ongoing Sino-U.S trade showdown to Italian budget fears and President Trump’s unpredictability ahead of U.S midterm elections.

On tap for this week, the Bank of Canada (BoC) is expected to increase its policy rate by +25 bps to +1.75% on Wednesday (Oct 24) despite last Friday’s disappointing inflation and retail sales readings.

Elsewhere, the European Central Bank (ECB) is expected to leave policy unchanged, but questions regarding Italy and its budget issues are expected to be front and center.

In Scandinavia, Sweden’s Riksbank and Norway’s Norges bank take center stage mid-week.

Stateside, earnings season gathers pace with notable highlights including Amazon, Alphabet, Intel, Verizon, Microsoft, Twitter, McDonald’s, and Caterpillar.

1. Stocks in the black

Japan’s Nikkei edged higher, supported by a rally in Chinese stocks on the promise of additional stimulus measures, triggering buying in firms exposed to China. The Nikkei share average rallied +0.37%, moving off a six-week low hit during last Friday’s session. The index is now down around -7.5% since hitting a 27-year high on Oct. 2. The broader Topix edged +0.15% higher.

Down-under, Aussie stocks ended lower on Monday, as political concerns rattled investors after the governing coalition looks set to lose its one-seat majority in parliament following a weekend by-election. The S&P/ASX 200 index closed -0.6% lower. In S. Korea, the Kospi stock index climbed on Monday supported by a strong Chinese market. The index rallied +0.5%.

In China, stocks surged overnight in the wake of coordinated statements of support by senior regulators, and as China prepares to overhaul its income tax law for individuals. The benchmark Shanghai Composite index was +4.2% higher, while the blue-chip CSI300 index jumped +4.4%.

The gains extended to Hong Kong, where the Hang Seng index added +2.3% and the China Enterprises Index ended +2.6% higher.

In Europe, indices trade higher across the board. Italy’s FTSE MIB outperforms after Moody’s cut the countries rating to the lowest investment grade, but put the outlook as stable, helping BTP futures rally.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx600 +0.22% at 362.02, FTSE +0.26% at 7,066.00, DAX +0.52% at 11,614.01, CAC-40 +0.24% at 5,096.82, IBEX-35 +0.73% at 8,957.30, FTSE MIB +0.66% at 19,205.50, SMI +0.30% at 8,892.50, S&P 500 Futures +0.18%

bco_usd_2018-10-21_2d_m-7710519

2. Brent oil back above $80 as Iran sanctions loom

Brent crude oil prices remain better bid as markets are expected to tighten once U.S sanctions against Iran’s crude exports come into effect in November.

Brent crude oil futures are at +$80.26 a barrel, up +48c, or +0.6%, above Friday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$69.60 a barrel, up +48c, or +0.7%.

Note: The U.S sanctions on Iran, the third-largest producer in OPEC, are set to start on Nov. 4.

OPEC agreed in June to boost supply to make up for the expected shortfall in Iranian exports, however, recent data suggests that OPEC is struggling to add barrels as an increase in Saudi supply was offset by declines elsewhere.

Nevertheless, relief may come from the U.S, where offshore drillers added four oilrigs in the week to Oct. 19, bringing the total count to 873, according to Baker Hughes data on Friday. After months of stagnation, U.S crude production is expected to rise.

However, undermining sentiment is weaker China growth data and the ongoing Sino-U.S trade dispute. The full impact of the trade war is expected to hit markets early next year and provide a considerable drag on oil demand.

Ahead of the U.S open, gold prices have edged higher overnight towards their three-month peak hit last week, as the ‘big’ dollar eased and worries over rising political tensions slowing global economic growth lent support to the ‘yellow’ metal. Spot gold is up +0.1% at +$1,226.52 an ounce, while U.S. gold futures are also up +0.1% at +$1,229.50 an ounce.

xau_usd_2018-10-21_2d_m-62989243. Italian yields drops by most in 4-months on Moody’s decision

Italian sovereign yields dropped across the curve after ratings agency Moody’s kept the country’s sovereign ratings outlook ‘stable’ while delivering an expected downgrade last week. The market was worried that the outlook would be ‘negative.’

Note: S&P’s review is expected this Friday (Oct 26). It now rates the country two notches above junk at BBB.

Italy’s five-year BTP yield dropped -36 bps to a two-week low of +2.63%, while the benchmark 10-year yield was -26.5 bps lower at +3.39%, its biggest daily drop in four-months. The BTP/Bund 10-year yield spread tightened to +284 bps.

Elsewhere, the yield on the U.S 10-year note rose +1 bps to +3.20%, while Germany’s 10-year Bund yield increased + 2bps to +0.48%. In the U.K, the 10-year Gilt yield climbed +1 bps to +1.588%.

gbp_usd_2018-10-21_2d_m-9458366

4. Dollar quiet across the board

The EUR/USD is a tad lower at €1.1515 after testing a high of €1.1550 overnight on the back of a relief rally in the 10-year BTP/Bund spread. Nevertheless, event risk persists ahead of the deadline for Italy to respond to the E.U Commission’s initial objections over the 2019 budget plan.

Expect Thursday’s ECB meeting to be closely watched, especially Draghi’s press conference, where the market is looking for more color on how the ECB would reinvest maturing QE proceeds post December this year.

GBP/USD is -0.3% lower at £1.3030 as Brexit talks again reached an impasse. However, PM Theresa May believes that +95% of the Brexit withdrawal deal is “now settled.” It’s believed that the PM is facing a rebellion by more than 40 Tory MP’s if she does not back down to fresh demands from Brexiteers’

Note: 48 votes are necessary for a leadership challenge

eur_usd_2018-10-21_2d_m-8677158

5. Italy says it’s ready to discuss budget with E.U authorities

The Italian government is ready to sit and discuss its budget targets with E.U, Deputy Prime Minister Luigi Di Maio said this morning, restating that the “populist” coalition had no plan to leave the euro.

Italy has sent a letter to the commission explaining its reasons for sticking to the +2.4% goal, and that the government was ready to “sit at the table”.

Note: Italy wants to hike its budget deficit to +2.4% from this year’s +1.8%. Last week, the E.U Commission labeled Italy’s 2019 draft budget an “unprecedented breach of EU fiscal rules.”

fxhm_all_20181022-2149988

bear-market-risk-300x300-4617338

dollar-currencies-graph-background-3271341

Cloudbusting: you  just know that something good is going to happen

US markets

In the span of a mere 24 hours two of my most pressing question may have been answered, correctly, can the anomalously robust US equity market hang on in the face of mounting global risks? And are we entering a period of drawn-out USD selling?

Mind you, with many distractions on the radar, there are two not so subtle, under-the-radar distractions sending global trading floors abuzz this morning. Specifically, the astonishing outperformance in both US equities and emerging markets.

US equities markets soared to their biggest gain in six months following strong earnings and uplifting reports on the economy.

The Labor Department reported that U.S. employers posted the most jobs in two decades in August as expectations around hiring continued to outpace while US industrial pace and the Federal Reserve said output by U.S. factories, mines and utilities climbed in September despite the effects of Hurricane Florence.

Equity investors took their cue from the industrial production report which indicated inflation isn’t picking up, triggering another Goldilocks economy rally. But whatever signal convinces investors the Fed will not move interest rates up quicker than expected will be latched on to the big time especially in the face of robust US data. 

But let’s take this move in context, sure +2 % gain on the S&P is astonishing in anyone’s book, but significant indexes are still broadly lower for the month following last week 2-day meltdown as investors fretted over a fast pace of Fed policy normalisation.

However, it is the best of both worlds for US equity markets, with the economy in full swing but nary a sign of inflation as Goldilocks returns for yet another day. Which is providing a much need diversion from trade tensions and concerns about global growth downtrend. Also, the dollar fell overnight as traders are contemplating the Greenback fate ahead of the US midterm elections.

Nothing like a robust US market and a  USD lacking any momentum to trigger the Asian market into action!

Oil Markets

The American Petroleum Institute figures for the week ended October 12 showed an unexpected 2.1 million barrels per day decline in US crude oil inventories even as stocks at the Cushing, Oklahoma delivery point for NYMEX WTI futures increased by another 1.5 million barrels per day. But the headline did catch momentum speculators wrong-footed who were expecting another build.

Prices were also bolstered by rising US stock market providing a welcome distraction from trade tensions and concerns about global growth as investors are back focusing on tighter global supply due to Iran sanctions. It’s widely expected that Iranian exports, which are already dropping, will fall quite sharply from November onwards, and even if Saudis and other OPEC bodies have compensated the anticipated shortfall to some degree there will undoubtedly be a near-term imbalance which will pressure prompt prices

On a side note regarding a slower global growth narrative or an adverse knock demand side effect from weaker the US emerging market currencies, there’s no definitive, quantifiable data to support this view, as global energy demand remains robust by any demand-side measure.

None the less Brent prices risk is skewed higher as Venezuela, other the Middle East concerns, North and West Africa remain hotspots for supply disruptions in coming months. And with traders all too aware that we are little more than one supply disruption away from a move above $ 85 Brent, prices remain very well supported on pullbacks after reaching four-year highs last week.

Gold Markets

Given the political firestorm igniting around the US Midterms, Italy, and US-Saudi tensions, gold’s upside is looking favourable as a tail hedge against these escalations. The mid-term elections in themselves will provide more than enough political fodder to keep the flames going, not to mention the possible equity market drawdowns from a shift of power in the “house” if a Blue wave takes control.
Gold did back off from intersession highs as US equity markets rallied convincingly, which was triggered by a more robust US Industrial production data. But with inflation absent from the report, it doesn’t shift the Fed dial. This view is significant for Gold prices as it suggests without an uptick in US Inflation for the USD to tether itself to in the run you to the US election, we could see the dollar sell-off as US political headline risk is expected to escalate and should lead to Gold outperformance.

But on a near-term break of the signification $ 1234-1236 zone and given the bearish Hedge Fund compositions and structures on the Comex will come under intense pressure and we could see $1250+ in a heartbeat if these established short positions show signs of buckling.

However, perhaps a hawkish warm-up ahead of tonight’s FOMC minutes San Francisco’s new President Daly said she does think it’s a balance between hiking too fast and getting behind the curve but her remarks on the economy are strong. On inflation, the Fed is “effectively at the 2.0% target.” For potential tailwinds, however, she does name three: financial conditions, global growth, and fiscal stimulus.

Currency markets

The Yuan

The CNH will be closely watched in Asia today after some shifting sentiments were observed in the NY market. But the latest China inflation prints were failing to highlight just how problematic higher prices are for Chinese consumers while only suggesting that producers are unable to pass on higher cost from the weaker Yuan and or tariffs impact.

The US Dollar

Traders will be watch USD housing starts intently, remembering that the housing industry has been the most disappointing segment of US data in 2018.

While the TIC data has taken on a secondary level of importance in recent years, one question mark China’s holding of US Treasuries fell for a third consecutive month in August. I don’t believe there is anything sinister in this trend other than the fact the Pboc could be building their USD war chest to intervene if the Yuan moves too quickly above 7? Or its little more than prudent reserve management policy with the markets expecting the USD to struggle in 2019

We are starting to see signs of a USD capitulation ahead of the US midterms as dollar bulls are becoming increasingly nose-ringed to the US midterms elections.

The Euro
Currency markets are cautiously busy with most of the focus on JPY and EUR in New York, but well-worn ranges held

Little has changed from last week view that was dominated by risk reduction of USD long positions. In the meantime, the EURUSD is struggling to break through a wall of offers between 1.1600 -25. None the less, when EURUSD eventually breaks it’s 1.1450 1.1750 range, it will be through the top of the range, but given the temperament and choppy nature of trading the EURUSD these days, it will require a great deal of patience.

The Japanese Yen
The USDJPY moved convincingly lower on last week US equity led meltdown. Traders are monitoring the scope of the latest US equity market recovery. But on another equity market wobble risks remain more significant to the downside for USDJPY as the midterm US elections near.

The British Pound
Sterling has been weighed down by virtually every conceivable negative Brexit headline, but there is no denying the latest employment report that is signalling ages are now growing faster than prices!! The Pound continues to grind higher even although a Bank of England rate hike is very much dependant on Brexit going through

The Malaysian Ringgit

With China trade headlines mostly absent, regional markets have been much calmer this week. But oil has been sending mixed signals but remains well bid on dips, which should be supportive of the Ringgit, But the focus will be on   the CNH today( see above)

dollar-currencies-graph-background-300x209-7491971

arms-trade-business-concept-13

Tuesday October 16: Five things the markets are talking about

The ‘big’ dollar came under pressure yesterday and is finding it difficult to gain much traction this morning as investors taking profit on U.S assets outweighs concerns about Italy, Brexit and a Sino-U.S trade war. Furthermore, twin U.S deficits and prospects of a halt in Fed’s rate hike cycle are also weighing on the dollar.

Elsewhere, it has been mixed picture across regional stock markets overnight as investors await the next wave of corporate earnings and further developments across the aforementioned geopolitical issues.

Note: Any hint of a slowdown or stronger growth could affect the pace of Fed’s rate hikes.

Oil prices continue to fluctuate within striking distance of recent highs amid tensions between Saudi Arabia and the U.S over the disappearance of Jamal Khashoggi, a prominent journalist with U.S citizenship, while the precious ‘yellow’ metal holds its gains.

On tap: FOMC minutes are due Wednesday (02:00 pm EDT), with investors focused on projections for further interest rate rises.

1. Stocks mixed results

In Japan, the Nikkei rebounded overnight, supported by short covering in index heavyweights (automakers and SoftBank), but retailers came under pressure on worries about domestic personal consumption and slowing demand from China. The Nikkei share average closed +1.3% higher, after tumbling -1.8% yesterday. The broader Topix rallied +0.7%.

Down-under, Aussie shares rebounded overnight, as mining and financials bounced back from Monday’s -1% drop and six-month low, but rising tensions between Saudi Arabia and the West and weaker PPI data in China capped broader market gains. The S&P/ASX 200 index rose +0.6%. In S. Korea, the Kospi stock index closed flat on Tuesday as global uncertainties capped gains during the day.

In China, stocks ended lower overnight, after data showed factory-gate inflation had cooled for a third consecutive month in September amid lean domestic demand. The blue-chip CSI300 index ended -0.8% weaker, while the Shanghai Composite Index also closed -0.8% lower. In Hong Kong, the Hang Seng was up +0.1%.

Note: Chinese inflation was boosted by food while prices were mostly subdued elsewhere. China Sept CPI y/y came in as expected at +2.5% vs. +2.5%e (a seven-month high): PPI y/y was +3.6% vs. +3.5%e.

In Europe, regional bourses trade mostly higher across the board with the Italian FTSE MIB outperforming following the submission of its draft budget to the E.C, while the U.K’s FTSE underperforms on Brexit uncertainty.

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

Indices: Stoxx600 +0.4% at 361, FTSE -0.2% at 7012, DAX +0.2% at 11638, CAC-40 +0.1% at 5099, IBEX-35 +0.9% at 9004, FTSE MIB +1.1% at 19500, SMI +0.3% at 8678, S&P 500 Futures +0.3%

bco_usd_2018-10-15_2d_m-2871680

2. Oil dips on expectations of higher U.S stocks, gold unchanged

Oil prices have eased a tad amid expectations of an increase in U.S crude inventories, but signs of a fall in Iranian oil exports for October are limiting losses.

Brent crude for December delivery has fallen -6c, or -0.07%, to +$80.72 per barrel, while U.S West Texas Intermediate (WTI) crude for November delivery is down -14c at +$71.64 a barrel.

U.S crude stockpiles are forecasted to have risen last week for the fourth consecutive week, by about +1.1M barrels, ahead of reports from the API (data is due at 4:30 pm today) and the U.S DoE’s EIA (will be released at 10:30 am EDT tomorrow).

In the first two weeks of October, Iran has exported +1.33M bpd of crude to countries including India, China and Turkey. That is down from +1.6M bpd during the same period in September.

Note: October exports are a sharp drop from the +2.5M bpd in April before President Trump withdrew from a multilateral nuclear deal with Iran. In May Trump ordered the re-imposition of economic sanctions on the country. The sanctions will come into force on Nov. 4.

Also supporting prices is today’s comments from OPEC’s Secretary General Barkindo who said, “global spare oil capacity was shrinking,” adding “producers and companies should increase their production capacities and invest more to meet current demand.”

Ahead of the U.S open, gold prices are holding steady near yesterday’s three-month high as a number of risk-averse investors seek refuge in the metal amid rising political tensions and economic uncertainty.

Spot gold was little changed at +$1,226.71 an ounce – it touched +$1,233.26 yesterday, its highest print since mid July, as global equities slid on rising tensions between the Saudi’s and the West. U.S gold futures are flat at +$1,230.40 an ounce.

xau_usd_2018-10-15_2d_m-4679195

3. German Bund yields edge higher

A cautious, risk-on mood currently prevails in eurozone sovereign bond markets so far this morning, with yields of German Bunds and of other core eurozone bonds up, and Italian bond yields down.

This would suggest that market risk sentiment may be improving following last week’s sudden correction, but the balance remains a tad precarious in the current political environment. German 10-year Bund yield has backed up +1.4 bps to +0.51%.

Note: The +0.50% level in Bund yields remains pivotal and with more debt product coming to market today (Germany offers +€4B in the September 2020-dated Schatz) should be able to back up sovereign yields a tad more.

Elsewhere, the yield on 10-year Treasuries has backed up +1 bps to +3.17%, the highest in a week. In the U.K, the 10-year Gilt yield has decreased -1 bps to +1.603%, the lowest in almost two-weeks, while in Italy, the 10-year BTP yield has declined -2 bps to +3.522%.

eur_usd_2018-10-15_2d_m-1098996

4. G7 currency pairs are little changed

Major currencies (€, £, ¥ and C$) are relatively unchanged ahead of the U.S open.

Dealers and investors have little technical or fundamental data to work with at current levels. In fact, the market is looking for guidance, which may come in the shape of the U.S Treasury forex report, which is likely to be released this week and where the U.S could name China a currency manipulator.

If the U.S were to name China a currency manipulator it would further pressure China on trade and add to the Sino-U.S trade tensions.

EUR/USD is flat at €1.1579 and other major currency pairs are not moving by much either. GBP/USD is up slightly at £1.3163 as leaders struck a conciliatory tone a day after Brexit negotiations broke down and USD/JPY is up +0.3% at ¥112.07

Elsewhere, the performance of several petro-forex (NOK, CAD, RUB) has been held back due to various unique factors that have not translated into a growth boost for these currencies. The ruble has been driven by U.S sanctions, and the Canadian dollar has been held back by NAFTA re-negotiations.

TRY (-0.20% at $5.7865) has retreated after seven days of gains after the country released U.S pastor Andrew Brunson on Friday.

gbp_usd_2018-10-15_2d_m-7151730

5. U.K wage growth fastest in a decade

U.K data this morning showed that wage growth quickened over the summer at the fastest pace in almost a decade, adding to signs of inflationary pressure.

The ONS said that average weekly earnings in Britain, ex-bonuses, grew +3.1% in the three-months through August.

The figures will likely reinforce market expectations that the BoE remains on course tighten monetary policy over the next 24-months to keep overall price-growth in check, assuming the U.K.’s exit from the E.U goes well.

Other data showed that U.K unemployment in the three-months through August was unchanged on the previous three-months at +4%, while the number of people in work, +32.4M, remained close to its record high.

Note: The BoE hiked interest rate in August and signalled that they expect to do so again two or more times over the next couple of years to bring inflation back to their +2% annual goal.

A weaker pound since the Brexit referendum has to push up the price of imports, squeezing U.K citizens’ purchasing power.

fxhm_all_20181016-5110765

dollar-trade-war-bullets-300x226-9900552

asia-map-4973313

China Data

China CPI data came out bang on market expectation while the PPI rose slightly 3.6 % versus 3.5 % but continues to trend lower despite weaker Yuan and tariff price pressures. But given the delta to expectations are negligible there isn’t much of trade to be had on the data.

Regional equity markets

Regional markets are trading more positively this morning as overall regional volatilities are falling. A weaker US dollar profile is helping to cool depreciation pressure on the Yuan as overextended shorts are getting pared. Don’t confuse this recovery with anything other than consolidation amidst a protracted downtrend in Asia equities. Traders are looking to sell upticks given that intraday volatility can ignite on the drop of a dime.

While neither new or original for that matter and with discussions centring on market uncertainties the topic of China infrastructure spending is making the rounds yet again.

Since additional monetary easing could trigger a run on the Yuan; there’s more chatter that China will move back to its old habits of pumping up infrastructure spending to boost economic growth as Beijing is preparing to pull out their old stimulus playbook.

But overall a quiet start today in the wake of an unusually quiet Monday in US market.

Oil markets

Oil bulls are latching on to falling Iran export data which showed the country’s exports fell even further during the first half of October. Which gives rise to the spare capacity ” proof is in the pudding” argument that until supplies are made quantifiably available, given Venezuela and Iran shortfalls, that squeeze in supply should be enough to support Oil prices until proven otherwise. With so much noise in the market, traders top side ambitions could temper ahead of this week’s US inventory data sets.

Currencies

The US Dollar 

Dollar bulls still fear we are little more than a Jay Powell headline away from sending the dollar into full out retreat. especially if he or this week FOMC minutes do walk back the hawkish market interpretation from the last policy meeting.

The Yuan

The USDCNH remains in a very tight range with overnight funding getting extraordinarily liquid, but the forward curve remains under pressure as traders continue to unwind some of the USD paid in forwards on a carryover from the slight de  escalation of USD-China tension on the back of Trump -Xi meeting and a softer tone for the Pboc at the IMF in Bali. However, USDCNH remains bid on dips below 6.92 despite today’s CNY  fix at 6.9119 today, -35 pips from last fixing and -151 pips from the previous closing at 6.9270 on 16:30 Beijing time. But well in line with market expectations.

With lower CNH vols comes some breathing room for local EM as the Won is making significant headway after the softer US retail sales print. In the absence of strong US economic data for the USD to anchor too, it continues to struggle but EM risk is fraught with peril, and I suspect this is more of a case positions squaring rather than bullish bets put on the table.

New Zealand Dollar

NZD CPI has overshot expectations: +0.9%QoQ for Q3 versus 0.4% prior and 0.7% expected. The RBNZ forecast stood at 0.4%. but taking the gains from energy out of the equation but with very mixed signals on the USD appetite to fade the move has been muted as dollar bulls remain nose-ringed to this weeks FOMC minutes

Risk remains on the back foot

Daily Markets Broadcast – 2018-10-16

asia-map-300x199-4249004

yuan-symbol-china-flag-with-the-financial-data-in-the-background

Risk remains on the back foot

Risk sentiment remains on the back foot as the volatile stock action continued in Asia and Europe overnight. And while the US markets ended a very jittery day lower, the losses were limited as the markets enter a stalemate period to rethink the plethora of looming market uncertainties, ambiguities and flat out worries in what was an untypically quiet New York session. But this relative calm belies the building storm clouds on the horizon.

The world economy is facing multiple complications none more so than the reality that while US economy is settling into a stable growth trajectory, the rest of the world continues to wrestle with slower growth and currency pressures. Which raises the big question, how long can the anomalously robust US market hang on in the face of mounting global risks?

China uncertainty

The most significant risk for Global markets is neither a correction in US markets or the argument that US assets are overbought and need a ” shake out” as they are overbought for a reason. But instead, trade wars and  China’s domestic financial polarity has taken a toll on both local and global economies, which has lost significant growth momentum. So far, the Pboc has resisted dipping into the cookie jar knowing that short-term monetary policy adjustment could worsen rather than improve conditions as this could lead to Yuan instability. While the renminbi’s depreciation has arguably offset some of the negative from the tariff impact but further currency depreciation or even using it as a competitive tool could set off intense waves of capital outflow- which could lead to a currency depreciation spiral. A consequence that should make global capital markets tremble.

Rock and a hard place 

Most developed countries are not much better off due tot he plethora of debt on the balance sheets while still running in a historically low-interest rate environment. It’s not like they have any room to stimulate the economy. And while this slowdown in global growth momentum could be little more than a bump in the road in the expansionary cycle given trade and geopolitical concerns the big problem is that concerns around Brexit unknowns; German Chancellor Merkel’s political losses in regional elections; US-Saudi relations and of course US-China tension, is showing little signs of easing. And with Citibank’s Economic Surprise Index for the US (CESI USD) back in negative territory, no wonder equity investors are doing a cut and run.

Oil Markets

The petroleum markets tested the upside as tensions flared over the disappearance of journalist Jamal Khashoggi, but have calmed down since Saudi Arabian Energy Minister Khalid Al-Falih assured that the kingdom would remain a reliable supplier to its customers.

However, there was no explicit mention of Saudi’s using oil as their ” ace in the hole” bargaining chip against possible US sanctions, which would be like committing political suicide as far the US -Saudi relations if not the rest of the world. Look no further than the reaction of the corporate worlds were hoards pulling out of next week’s Financial Conference in Riyadh, dubbed “Davos in the desert”.

But West Texas Intermediate crude oil turned higher on Monday as the US Bureau of Safety, and Environmental Enforcement reported 198,622 bpd of crude oil production still offline due to Hurricane Michael, bringing total production losses to over 3.5 million barrels per day.

While Brent Crude is finding further support from the latest round of observed crude and condensate export data for Iran, which showed the country’s exports fell even further during the first half of October.

But we’re squarely back to the case of competing narratives where the oil market is “adequately supplied for now,” but the supply losses from Venezuela and Iran leave the market suffering from “strain,” according to a new report from the International Energy Agency (IEA).

But with the geopolitical embers are glowing threatening to ignite the middle east powder keg, and with traders all too aware that we are little more than one supply disruption away from tipping the fragile Oil market supply and demand apple cart, oil prices remain firmly supported in early Asia trade.

The spare production capacity argument should continue to support oil over the short term. The IEA pegged additional capacity at around 2 million barrels per day. But the markets know these reserves have never been tested raising the questing how much extra capacity can be brought online immediately But, in the meantime, until additional supplies are made available, that crimp in quantity should be enough to support Oil prices until proven otherwise

Gold Markets 

The Gold Rush has cooled off a bit but with the USD and global equity market looking increasing fragile dips will be supported. While much  of yesterday’s prices action was triggered on the unwinding of short positions last weeks, break if 55day moving average and with traders now eyeing the critical 100day at $1239 suggest a push higher on any hint of equity market weakness

Malaysian Ringgit

The Ringgit continues to trade defensively ahead of the budget, but there were few EM specific currency developments Monday.

china-yuan-chn-300x199-2997688

interest-rate-on-ice-9

Monday October 15: Five things the markets are talking about

Following a weekend of warnings on global economic fragility from G10 finance leaders at an IMF meeting in Bali, has global equities starting this new week on the back foot, with regional bourses in Asia and Europe seeing red, while U.S equity futures are pointing to deep declines.

Sovereign yields are lower in this cautious climate, while yen has pushed higher along with gold. Crude oil has advanced as tensions rise between the U.S and Saudi Arabia over a missing journalist.

Politics and data are never a good mix and this week is awash with both.

Italy is to submit its contentious budget to the E.C. Already; the proposed budget has potentially broken specific thresholds, which would require a lot of debating from both parties. Expect Italian BTP yields again to come under pressure, backing up towards the psychological +4%.

The E.U meets on Wednesday and will get an update on the status of negotiations with the U.K’s Brexit. Expect the Irish border to be the ‘hot topic du jour. If there is insufficient progress, the possibility of a special summit next month to finalize an agreement looks dead in the water. Dealers expect the pound to remain volatile in the short-term.

The U.S Treasury report about the international economy and the FX market is to be released Tuesday. To neutral observers, China does not meet the threshold of “manipulation.” However, Trumps interpretation may be very different.

On the data front, the U.S releases retail sales this morning (08:30 am EDT) and FOMC minutes on Wednesday.

Across the pond, the U.K presents its labour report tomorrow, (Oct 16) inflation Wednesday (Oct 17) and retail sales Thursday (Oct 18).

In Canada, Friday’s upcoming data includes retail sales, and CPI – neither of the reports are expected to dissuade the market of pricing in a +25 bps rate hike at next weeks Bank of Canada (BoC) monetary policy decision.

1. Equities see red

In Japan overnight, the Nikkei closed at a two month low as automakers and other manufacturers were hit by news that the Trump administration would seek a provision about currency manipulation in future trade deals. The Nikkei share average ended down -1.8%, the weakest closing point since mid-Aug, while the broader Topix dropped -1.6%, the lowest close in seven-months.

Down-under, the ASX 200 fell to a six-month low overnight, led by the banking sectors growing concerns about the hit to earnings from an inquiry into misconduct. The S&P/ASX 200 index fell -1%. In S. Korea, the Kospi stock index fell -0.77% as institutions cut their exposure to riskier assets. The country’s biggest automaker Hyundai Motor slipped -1.7%, marking its lowest trading level in eight-years.

In China and Hong Kong, stock markets again slipped overnight following last week’s deepest dive in eight-months, as investors await the latest twist in the Sino-U.S trade dispute. The Shanghai Composite index closed lower by -1.5%, while in Hong Kong the Hang Seng closed -1.4% lower.

In Europe, regional bourses trade lower across the board, tracking U.S futures and Asian indices lower. The FTSE and sterling (£1.3140) trade a tad lower after the E.U and U.K paused Brexit talks until after this week’s mini-summit.

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

Indices: Stoxx600 -0.6% at 356.8, FTSE -0.3% at 6976, DAX -0.4% at 11474, CAC-40 -0.6% at 5066, IBEX-35 -0.3% at 8876, FTSE MIB -0.2% at 19225, SMI % at -0.8%, S&P 500 Futures -0.8%

bco_usd_2018-10-14_2d_m-6632060

2. Oil prices rise on Saudi tensions, gold higher

Oil prices remain bid this Monday morning as tension over the disappearance of a Washington post journalist and Saudi critic, Jamal Khashoggi, fuelled supply worries, although concerns over the long-term demand outlook dragged on sentiment.

Brent crude oil jumped +$1.49 a barrel to a high of +$81.92 before easing to +$81.13, up +70c. U.S crude (WTI) was last up +40c at +$71.74.

Saudi Arabia has been under pressure since Khashoggi, a U.S. resident, disappeared on Oct. 2 after visiting the Saudi consulate in Istanbul.

President Trump has threatened “severe punishment” if it is found that the journalist was killed in the consulate.

On Sunday, the Saudi’s said it would retaliate to any action taken against them over the Khashoggi case. The market is tentatively concerned that the Saudis may use oil as a tool for retaliation.

Despite prices starting the week better bid, there are still lower that last week’s high print.

Also limiting price gains is a report from the IEF last Friday stating that the market looked “adequately supplied for now” and cut its forecasts for world oil demand growth this year and next.

Ahead of the U.S open, gold prices have jumped +1% to hit a three-month high as global stocks resumed their fall and investors wrestled with the impact of the ongoing Sino-U.S. trade war and higher U.S interest rates. Spot gold is up +0.9% at +$1,228.24 an ounce, while U.S gold futures are up +0.8% at +$1,231.80 an ounce.

xau_usd_2018-10-14_2d_m-3513964

3. Italian and Portugal yields fall

Portuguese and Italian government bond yields have fallen this morning, with prices outperforming euro zone peers after ratings agency Moody’s upgraded Portugal’s credit rating back to investment grade.

Portugal’s 10-year bond yield fell -4 bps to +2.01% after Moody’s lifted its credit rating to Baa3 on Friday.

The positive periphery sentiment from Portugal has spilled over into Italy’s battered bond market. Italian 10-year BTP yields are down -4.5 bps to +3.53%.

Note: Expect Italian yields to trade rather volatile this week as Italy presents its budget to the E.C.

Elsewhere, the yield on U.S 10’s fell -1 bps to +3.15%. In Germany, the 10-year Bund yield has dipped -1 bps to +0.49%, the lowest in more than a week. In the U.K, the 10-year Gilt yield has eased -2 bps to +1.614%, the lowest in more than a week.

gbp_usd_2018-10-14_2d_m-2466557

4. Dollar’s safe haven flows ease

Risk aversion flows initially provided a bid for the traditional safe-haven currencies of JPY (¥111.75) and ‘big’ USD, however, market sentiment has eased a tad ahead of the U.S open.

GBP (£1.3147) opened below the psychological £1.31 handle on concerns that a Brexit agreement might be slipping away after the U.K and E.U negotiators were said to have called ‘a pause’ in their Brexit talks and would now wait for the outcome of a summit mid-week (Wed) before any resumption.

TRY ($5.8208) is firmer by over +1% outright for its seventh session gain on optimism that relations between Turkey and U.S would improve following the release of U.S Pastor Brunson.

Bitcoin prices have spiked +6.5% this morning, jumping above +$6,600. While the catalyst behind the move higher is not clear and with few ready to label bitcoin a “true store of value” in turbulent times, BTC has held up better than most of late.

eur_usd_2018-10-14_2d_m-2730289

5. Embarrassing losses in Bavarian election shake Merkel’s coalition

Germany’s grand coalition could become even further unstable after coalition members suffered humiliating results in an election in the southern state of Bavaria.

Chancellor Merkel’s Bavarian allies slumped to their worst election results in almost 70 years and her junior coalition partners, the center-left Social Democrats (SPD), saw support in Bavaria halved.

The SPD had hoped that infighting over immigration between Merkel’s Christian Democrats (CDU) and the Bavarian Christian Social Union (CDU) allies would give them a boost in Bavaria.

But instead, the party saw support fall to just under +10%, prompting a discussion over the sustainability of its alliance with Merkel’s conservatives at the national level.

Note: SPD members are still bitter over their leaders’ decision to join a Merkel-led government.

Merkel’s authority may be called into question as soon as in two-weeks in an election in the western state of Hesse – the state is ruled by Merkel’s CDU in a coalition with the Greens, but polls suggest she is losing further support.

fxhm_all_20181012-5167277

interest-rate-percent-increase-300x200-4835499

market-volatility-concept-3d-rendering-on-the-gears

Asia Markets 

Asia shares are trading lower this morning led my losses on the Nikkei which is down 1.4 % ahead of a supplementary budget but the usual themes are weighing on local sentiment. Concerns over China -U.S. trade tensions, a possible slowdown in the Chinese economy and higher U.S. interest rates continue to sour market views as domestic investors are better sellers than buyers of risk, despite  US market showing signs of stabilizing on Friday. Indeed the fear around US tariff increases due to take effect in January 2019 is factoring. And when compounded by the Bank of Communications suggesting China home prices are likely to fall in the next two quarters will indeed weigh on China markets. Indeed echoes of October pasts are reverberating across global capital markets.

Oil Markets update

After the initial spike higher on Saudis threat to hit back again any sanctions news, markets are settling in as the duelling narratives unfold. The lack of a current fundamental supply deficit in oil markets as supported by International Energy Agency monthly Oil Market Report indicating global demand is lower and terming supplies “adequate for now” Versus the spare production capacity argument especially if the market underestimates the supply crunch from Iran sanctions and Venezuela production. But let’s face it, we are little more than on supply disruption for prices shooting higher over the near term with traders now eyeing Libya after the NOC  warned of a possible closure of Zawiya refinery if security is not shored up.  The markets continue to trade gingerly with a positive bias as the Saudi narrative unfolds with Saudi suggesting $200 per barrel Oil not out of the question.

Gold Markets

Gold remains supported by escalating Geopolitical tensions as smouldering embers in the Middle East are yet set to ignite again on the latest Saudi developments. Adding the mix is the though may consider pausing their widely expected rate hike in December if global equity markets continue to falter. But an abrupt shift in Fed policy will likely lead to a lack of confidence in the worlds most important central bank and could destabilize markets further.

CNH

Focus back in the CNH has Pboc suggests there is plenty of room for monetary policy adjustment amid trade war. But tempered rhetoric by suggesting the currency was near fair value.

Reuters

They Yuan is fixed firmer than expected, however, and the market is not taking USDCNH higher.

Malaysia

China has agreed to purchase 500K tons of palm oil, which should support those local constituents on the Bursa Malaysia. No currency reaction to this news so far.

Brexit

So much for the defining moment in the Brexit negotiations after a tense standoff overnight, PM May sent Brexit Secretary Dominic Raab to Brussels, who then hightailed it home after only 1 hour after meeting with Barnier. The Pound has traded lower but finding tentative support around 1.31 as the Brexit roller coaster continues.

German Politics 

Perhaps flying under the radar Angela Merkel’s sister party has suffered massive losses in Bavaria’s state elections, exit polls suggest, in a blow to the German chancellor. The Euro hasn’t reacted to much to this news as I suspect dealers have bigger fish to fry as Italy’s budget is set to be offered up to the EU committee.

Rethinking it

Echoes of October pasts are reverberating ( OANDA Trading Podcast with BFM89.9)

Join me live discussing this morning Asia open at 12:15 PM SGT on  WATCH FRANCE 24 LIVE

market-volatility-300x200-8243627

usd_cny_us_china_hand-8531363

Well, that was dramatic, but some significant levels on equity markets held on a closing basis, while the DXY rallied into the close. But in the end, it was all about cleaning the slate while living to fight another day.

Next week spotlight falls on the USD and the RMB complex, and following the likely publishing of the much talked about US Treasury FX report, it’s going to be another packed week on the economic front for these currencies.

China a Currency Manipulator: Yes or No

Whit the odds at 50-50 chance that the US will go so far as to outright name China a “manipulator.”, For no other reason than the usual chorus of mixed signals from the US administration, with the worrywarts leading the way. White House Economic Advisor Kudlow opined on CNBC that China’s response to US requests is “unsatisfactory.” In contrast, Treasury Secretary Mnuchin said he’d had a “very productive” conversation with the PBoC but expressed his concerns about “the weakness in the currency.”

It all suggested that, while siding with no currency manipulator camp, the uncertainty around the report warranted at minimum a passive reduction in specific currency exposure, especially when risk off lead  to unwinds last week  of critical consensus short positions where  the “funders” tended to outperform And at maximum, cleaning the slate entirely including trimming AUD shorts and USDCNH longs.

Last week the EUR, JPY and CHF all went bid against the USD as equities took a plunge and the rally accelerated when Trump reminded everyone that no one is safe from the wrath of Trump, even his nominated Fed Chairman Jay Powell.

Europe Risk

In Europe, there will be more political intrigue. Italy will present it budget draft to the EU, keeping in mind the EU Commission already said last week in a letter to the Italian government that its latest fiscal plans point to “a significant deviation” from the path recommended for Italy by the EU Council. And headline risk is massive as the UK and EU are due to discuss Brexit at the EU Summit. But flying under the radar is the first major electoral test for any new government – this vote is in Bavaria. on Sunday

Oil Market 

Headwinds remain.

The S &P stabilised well and continued to roll with the punches, but Oil markets were not so eager to snap back. Oil prices were struggling to follow the equity market lead, after the International Energy Agency monthly Market Report adjusted demand lower by 110,000 bpd for both 2018 and 2019, reported an increase of 100,000 bpd in September OPEC production while pointing out OECD data suggests oil stocks are at the highest level since February. While advising that markets are adequately supplied,  which again highlights uncertainty over supply once the US sanctions on Iran take effect. Lordy Lordy, it’s a noisy market.

Reuters

Drillers added eight oil rigs in the week to Oct. 12 according to Baker Hughes. This is ahead of the Plains All American Pipeline Project which is set to start flowing on Nov 1 and should ease pipeline bottlenecks that have lower crude prices in the Permian Basin. The Sunrise Pipeline has a reported capacity of about 500,000 barrels per day.

Gold Markets

The current landscape remains exceptionally shaky if both stocks and US rates markets continue to recover significantly in the days ahead. As well there a plethora of tier one US economic data out next week, and given strength in the recent run of US economic data it has anchored the USD to fundamentals where the dollar has shown a tendency to appreciate. Without a significant break of the critical $1225 level its far to early to jump on the bullish gold bandwagon.

China Trade Data

Speaking of China data, I’m still perplexed why North American markets analysts were so enamoured about Beijing’s export data. Sure, it was surprisingly hardy versus market expectation, but it was impossible to factor in with any high degree accuracy ,the front-loading impact, which was more than evident to the local Singapore traders who were buying the USDCNH dip. Local’s tend to focus on electrical machinery exports which are Chinas biggest export, and given the surge in that sector, the data was not all that significant as exporters were fulfilling longer-term commitment before implementation of the latest tariffs on US$200 billion in Chinese exports. Even the so-called ‘ hoarding effect” on the commodity imports components was evident given the newly announced 10 % trade tariffs in mid-September impacted the data.

usd_cny_us_china_hand-300x200-7326995

major-currencies-risk-9487831

Friday October 12: Five things the markets are talking about

Volatility, in particular, for equities, has notched aggressively higher this week, now that sovereign bond yields are beginning to price out cheap money.

Stronger than expected U.S economic data and weak European underlying inflation in key countries is being blamed as the specific trigger for this week’s ‘bearish’ bout.

However, Chinese trade data released earlier this morning showed better-than-expected growth in Chinese exports has, at least temporarily, helped ease investor concerns about the damage to China’s economy from U.S tariffs and other trade friction.

China’s trade surplus with the U.S widened to a record +$34.1B in September as exports to the American market rose by +13% y/y, despite a worsening tariff war.

Global equities have staged a robust recovery; the ‘big’ dollar trades steady, U.S Treasury yields back up and crude oil prices recover while still heading for the biggest weekly drop in three-months.

Nevertheless, a gradual Fed rate increase remains the order of the day, especially after yesterday’s muted U.S CPI data – the market is pricing in a +25 bps move in December.

Since the Fed’s last meeting in September all data has been in line with the Fed’s depiction of an economy in which low unemployment will be coupled with inflation running near +2% for the foreseeable future.

1. Stocks sell off ends in Asia

Chinese stocks, among the biggest losers in a global market selloff this week, rallied overnight, as investors reassessed the impact of the Sino-U.S trade spat on the country’s economy and its markets.

In Japan, the Nikkei ended higher on Friday as investors took heart from gains in Chinese equities on upbeat export data, which generated buying in manufacturers exposed to China. The Nikkei share average gained +0.5%. On Thursday, the index slid -3.9% and for the week the index was down -4.6%, its biggest weekly drop since March. The broader Topix traded flat.

Down-under, Australia’s ASX 200 lagged most of Asia Pacific overnight as the heavily weighted energy and financial sector held the index back. It ended +0.2% higher, but fell -4.7% for the week. In S. Korea, its stock market rebounded from one of its biggest drops in seven-years. The Kospi rallied +1.5%, its first gain this month. The index fell -4.7% for the week.

In China, the main stock indexes bounced higher overnight after suffering massive losses this week, as investors went bargain hunting on the back of stronger Chinese exports data. At the close, the Shanghai Composite index was +0.9% higher, after touching near four-year lows yesterday. The index was down -7.6% for the week, its worst weekly performance in eight months. The blue-chip CSI300 index closed +1.49% higher.

In Europe, regional indices trade higher across the board rebounding from multi-month lows following a rebound in U.S index futures and Asian Indices.

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

bco_usd_2018-10-10_2d_m-1399754

2. Oil rebounds, but pares gains on adequate supply, gold lower

Oil has rallied overnight; rebounding after two-days of heavy declines, though prices pared gains after an IEA report deemed supply adequate and the outlook for demand weakening.

Brent crude has rallied +76c to +$81.02 a barrel, having dropped by -3.4% yesterday. U.S crude (WTI) has added +71c to +$71.68.

Note: Brent is still on course for a -3.7% decline this week, the biggest weekly fall in about four-months.

Oil found support from data showing that China’s daily crude imports last month hit their highest in four-months and from a rebound in equities.

Gains were pared, after a monthly report by the IEA said the oil market looked “adequately supplied for now” after a big rise in production and trimmed its forecasts for world oil demand growth this year and next. “This is due to a weaker economic outlook, trade concerns, higher oil prices and a revision to Chinese data,” said the IEA.

Ahead of the open, gold prices are under pressure as global equities rally, but the ‘yellow’ metal trades within striking distance of its 10-week high print in yesterday’s session. Spot gold is down -0.4% at +$1,218.86 an ounce, after rallying +2.5%yesterday, as this weeks equity rout sent investors rushing to safe-havens. U.S gold futures are down -0.4% at +$1,222.30 an ounce.

xau_usd_2018-10-10_2d_m-3653001

3. Yields back up on relief

Eurozone government bond markets show signs of relief as equity markets rebound. The 10-year Bund yield is trading +2.3 bps higher at +0.54%, pulling the yields of other core and semi-core issuers higher.

Note: Bunds yields are down from five-month highs reached earlier this week at +0.58%.

Eurozone periphery government bond yields trade lower, indicating a lower level of concern, at least for the day. Italy’s 10-year BTP yield is trading -4.5 bps lower at +3.53%.

Note: Italian 10-year bond yields rose to five-year highs earlier this week on tension between Rome and the E.U over Italy’s expansionary budget plans.

Elsewhere, the yield on 10-year Treasuries has backed up +3 bps to +3.18%, the biggest advance in a week. In the U.K, the 10-year Gilt yield has gained +2 bps to +1.694%. In Japan’s 10-year JGB yield has climbed less than +1 bps to +0.15%.

eur_usd_2018-10-10_2d_m-8110952

4. Dollar stable, EM pairs rally

USD initially tested multi-week lows as a weak Wall Street soured its recent bullish sentiment. Nevertheless, the greenback is off its worst levels as the equity sell-off has eased.

After jumping to an 11-day high of €1.1611 overnight, the dollar has stabilized and EUR/USD trades slightly higher, last by +0.1% at €1.1593. However, expect Italian fiscal risks and the direction of U.S yields to continue to drive the EUR/USD.

Emerging-market currencies are having another good day after weathering the global equity selloff this week. The South African rand is up +1.1% at $14.483, and the Mexican peso has gained +1.5% at $18.8718. The Turkish lira has paired some of its gains, but its trading +2% at $5.9451 – up +5% on the week.

The PBoC set yuan at weakest level since March 2017, a day after U.S Treasury staff advised Secretary Steven Mnuchin that China was not manipulating its the exchange rate. The midpoint for the dollar was ¥6.9120.

GBP/USD (£1.3215) is trading within striking distance of its three-week highs on hope for a Brexit agreement at the upcoming E.U leader summit next week. There is speculation that PM May is close to an agreement, but obstacles remain, as she requires the DUP Party ally and rebel Tory members support.

eur_gbp_2018-10-10_2d_m-4357898

5. Eurozone factory output rebounds

Data this morning showed that industrial production in the eurozone rebounded strongly in August, as surges in Italy and the Netherlands offset weakness in Germany to suggest economic growth across the currency bloc continues at a modest pace.

The E.U’s statistics agency said industrial production was +1% higher in August than in July, and up +0.9% on year. The market was looking for a monthly gain of just +0.2%.

It was the first rise in production since May, following two straight months of decline.

Today’s healthy rebound will likely reassure the ECB that the economy is on course to grow more slowly this year than last, but still at a rate that will lead to new jobs being created, thereby pushing wages and inflation higher.

Note: The IMF trimmed its eurozone growth forecast for this year to +2% from +2.2%, noticeably downgrading its growth projection for Germany to +1.9% from +2.2%.

fxhm_all_20181012-5167277

major-currencies-risk-300x200-4512380

wall-street-9618868

Not quite Goldilocks

Not to state the apparent but markets are finding themselves in a total state of discombobulation as we mercifully head towards the weekend. There have been multiple train wrecks over the past 24 hours, and the continuous wall of worry around US yields and US-China tension still weighs on equity sentiment.

Goldilocks? Yes and No

Not quite the Goldilocks narrative that we are so accustomed to after a weaker than expected inflation print (CPI) as those three bears are not so good-natured or harmless and are forever prowling looking for the opportunity to drive risk lower. The more moderate inflation prints only provided a modicum of repose and far from the antacid “plop- plop fizz-fizz ” oh what a relief it is, the market so desperately needed. Wall Street recorded its second day of steep declines. But there is one positive, however, as the overnight session came to a gruelling finale, New York traders could finally catch their breath. !!

However, some of my colleagues are suggesting EM FX rallied in response to the CPI data – implying that at least for some, the read on the data did that confirm markets are in the so-called Goldilocks zone where the US economy is – not too hot or cold, and just right. But I think the improving EM sentiment has more to do with the RMB complex.

Chinese Yuan
USDCNH sprung a leak through 6.88 overnight triggered by a Politico article which stated the internal report to Treasury Secretary Steven Mnuchin did not recommend that Beijing is labelled a currency manipulator and continued to place China on a monitoring list.

But adding to the momentum f China’s Ministry of Commerce issuing some comments regarding the arrest a technology spy, reports that China-US trade talks will resume and chatter that Xi and Trump will indeed be meeting at the G-20 sidelines next month. Trump is willing to meet with Chinese President Xi, but Beijing needs to show openness to compromise.

The moves lower on USDCNH have eased some anxiety, especially for EM Asia FX that that had been building in worst case scenarios that China could let the Yuan fall. But even more significantly for global markets is that the US Treasury Department’s staff has advised Secretary Steven Mnuchin that China isn’t manipulating the yuan as the Trump administration prepares to issue a closely watched report on foreign currencies, according to two people familiar with the matter. So, if Trump and Munichin accept these finding at face value, which the market agrees with, it could avert an EM Asia currency meltdown and would forestall an escalation of the U.S.-China trade war.

Positioning was heavy long USDCNH in Asia yesterday, and a cascade of stops losses have triggered on the move lower. At least this should offer a glint of relief for Asian capital markets.

USD Asia was under intense focus overnight Overall FX interbank volumes were approximately 45% higher across spot G10 & EM, as the upshot of US CPI, CNH headlines and continued cross-asset volatility and vital focal points USDJPY, EURJPY USDCNH and HKD experienced a two-fold increase in trading volumes. But none the less US-China relations remain to be the focal point for markets. There is some nervousness about the US Treasury Currency Report due to be released the week, but sentiment has thankfully improved for regional investors.

A Bullish Glint?
The overnight chatter does suggest that at a minimum there will be a softer tone on the currency manipulator theme, although the unpredictable nature of commander and chief Donald Trump does raise the level of uncertainty, and there could be more risk-reduction into the weekend as investors position more defensively. But this does offer a significant window of opportunity for the not so meek of heart.

Oil Markets
In the near term, crude oil traders will likely focus on global equity markets looking for any signs stability to conceivably mount a recovery for the current headwinds.

But oil markets are indeed going through an inflexion point of their own. OPEC’s Monthly Oil Market Report has followed the DOE Short-Term Energy Outlook reporting supplementary non-OPEC production growth, with a 200,000 bpd increase from a month ago which lessens demand for OPEC barrels.

The oil markets are sagging as more bullish bets performed a ” cut and run ” after Energy Information Administration showed Crude inventories rose by 6 million barrels in the week to Oct. 5, as analysts again wholly missed the dartboard expecting a build 2.6 million barrels. The EIA data came in lower than the eye-watering API build but its still a larger-than-expected increase for last week as refinery runs continue to fall due to seasonal maintenance work as another increase in Cushing WTI NYMEX delivery hub just added to the negativity.

With supply worries now gripping markets after this bearish EIA report, supply-side anguish has slinked into the equation as oil traders remain on the defence. Indeed, it’s hard to sugar coat this week’s inventory data, but for perpetual bulls like my self, if risk stabilises around improving US-China tension, there are some very cheap entry points on offer. And given positions are much cleaner after the latest ” Porthole” effect, there should be good support near and around $80 prompt Brent.

Gold Markets
This global market tumult was the opportunity that gold Bulls had been waiting for since last Wednesday when nascent sings of and impending equity market meltdown started to ferment as both US -Yields and US-China trade tensions were creating some significant headwinds. As the playbook suggested Gold markets finally showed some of life, but it took an absolute pummeling on equity markets to trigger demand as market lolloped towards critical l $1200 level. But on the break, buying accelerated as near-term stop-loss triggers came into play once the 50-day moving average gave way. But it was the softer than expected CPI print and with risk aversion remaining front and centre, it provided the catalyst to test the significant resistance level at $1225.

Currency Markets

Granted there’s always that initial shock factor when the Presidents preaches Tumpanomics especially when his views challenge the world’s most powerful central bank. But these types of outlandish remarks tend to have few lasting effects from my seat.

The Euro

The EURUSD has been driven by USD sentiment more than EUR itself. Both of Italy’s houses of parliament have voted in favour of the government’s fiscal outline, so it is only a matter of time before it goes to the EU. Political uncertainty and Italian politics that usually runs at a heightened emotional state, there enough uncertainty around this Budget that should keep the Euro lower view attractive.

The Malaysia Ringgit

Weaker oil prices will be offset by lower USDCNH. However, traders remain incredibly defensive on the MYR due to the escalating budget noise. While the could be some topside USD reprieve, the next big hurdle for regional currencies is the US Treasury report regarding currency manipulation on Monday as everyone is focusing on the US treasury view about China.

wall-street-300x200-5884678