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Fishing Trip edition.

I’m off for the next week on my annual deep-sea fishing trips. This year I’m fishing 15 hours off the coast of Sarawak while spending six consecutive days and nights on a leaky boat trolling the Laconia shoals as well as jigging the numerous oil rigs off the East Malaysia Coastline, which I’m looking forward too!

Into the depths of Malaysia

Moody US  Markets

Risk markets tentatively stabilised overnight attempting to bounce back from Wednesday ‘s steep equity sell-off. Of course, the big question is why given that little has changed and if anything, the Feds new Vice Chair Clarida, who the markets were extremely focused on, stuck to the data dependent optimistic view his boss Chair Jay Powell rolled out last FOMC cementing the December rate hike narrative. Not the best news for equity investors in the unstable environment as the FOMC continues to dig in their monetary policy heels.

But without trying to oversimply matters, the reason the markets stabilised is that everyone is still in buy the dip mode and or wants to sell the year-end rally as everyone expects 2019 to be a real stinker. But this also tells me that the market is nowhere near bearish enough and suggesting we’ve not even come remotely close to putting in a low on the S&P.

I’m always a long-term equities bull, and who isn’t?

Now, I’m still a long-term bull when it comes to equity markets. I know five years down the road the S&P will be trading much higher than it is today if history tells me anything. But when my signals suggest with more certainty, that the S&P will sell down to 2300-2400 before breaching 3000, I remain a much better seller of risk until the markets prove me wrong. I don’t think I’m alone as the short-lived move above 2700 was faded as investors took their cue from Nasdaq Emini’s which are tanking as various tech stocks are melting post-earnings.

What’s different about this sell-off 

So, what is different this time around versus the undulating markets we’ve seen for the past two months. Unlike the previous sell-off in 2018 that tended to hit a sector or two at a time, the breadth of the latest rout was much more pronounced as it was heavyweight champions of the US markets that were leading the way. Indeed, this sell-off is entirely different as on top of the mountains of geopolitical risk; US interest rates are rising quickly and mercilessly squeezing financial conditions. In turn, this is putting immense stress on both long bonds -long equity positioned portfolios that have been the markets mainstay due to central bank largesse.

With the Feds committed to draining the trough, and with US tax cuts expected to run its course. Markets will then pivot to the not too cherry prospect of a massive US deficit to fund. Sometimes you must pay the piper, and just maybe we’re going to have to pay the piper for a while.

Since the fasten the seatbelt sign is still on in my plane it suggests market turbulence is unlikely to leave the picture anytime soon.

First look at Tokyo 

Osaka looks  a bit firmer in pre-market action, but this will be as much about position squaring as it is bullish sentiment.

Oil Markets

Oil markets moved higher on profit taking after risk sentiment tentatively stabilised overnight. But the gains were further supported by another apparent shift in Saudi and OPEC oil policy. From putting customers minds at ease that the response to US sanctions on Iran will be to maintain adequate supply (maybe even a bit oversupplied) towards now keeping inventories under control. Indeed a subtle bullish retort. Market positioning is much cleaner now after the recent long oil position shakes out, so buyers. Bulls are less concerned about the crowded trade mentality trampling over bullish bets.

On the flip side, US inventory builds the proclivity for the front ” time spreads” to move to contango as well the macro sell-off which should continue to be critical downside catalyst are huge concerns. But the subtle shift in Saudi policy language should be enough to keep the bears caged, at least for the time being.

Gold Markets

It does appeal the battle lines are getting defined as Gold markets have entered a new trading zone $ 1228-1238, but of course, investor mood swings on the S&P are steering the ship. However, a hawkish nod from Vice Chair Clarida dented sentiment. Markets had shifted from 80 % probability of a December rate hike to only ~ 65 % after Wednesday equity rout. But Clarida optimistic view of the US economy has increased those odds today.
Ultimately, however, Gold will be a crucial hedge against a possible protracted global equities market meltdown, and with risk aversion gripping the market more aggressively than risk on, gold should remain bid on dips.

Currency markets

The Malaysian Ringgit

Regional sentiment remains very shaky but even more so for the Ringgit as budget time looms. The stronger USD profile across G-10 is not helping sentiment, and neither does Fed Clarida cementing his views for a US rate hike for December.

While global risk sentiment is improving into the weekend, all bets are off for next week as we continue to expect the USDMYR to nudge higher and test 4.18 resistance into the November budget release.

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China Risk 

USDCNY fixed at 6.9409 today, +52 pips from last fixing and +8 pips since the previous closing at 6.9401 on 16:30 Beijing time. A bit lower than markets expectations. But the jitters are evident as demand for font end vols is back in demand with everyone looking for topside again. And while USDCNH spot traded above 6.95 briefly again but failed to sustain a move, the writing remains on the wall for a push higher in coming weeks.

If you don’t think China-US hopes are fading, with both sides now looking set to dig in for the long-haul markets could get much worse before better. Asian investors better hold on to their hats, as markets are about to get extremely blustery.

The Yuan depreciation train could be arriving at the station anytime soon. Indeed, USDCNH warrants a high degree of attention as the test of the vaunted seven looks level increasingly inevitable as based on current price action it continues to suggest CNY/CNH depreciation is in the tea leaves. Ultimately the Pboc will need to offer up some good old fashion easing to stem the negative economic tide in China?

Risk off 

If people are struggling to find a driver I suggest, they wake up and smell the coffee. The catalysts are nothing new Tariffs, Italy, Brexit, Saudi Arabia. But ut with the towering pillars of market strength, the US equity markets, is looking ever so fragile and on the verge of crumbling.  The air is so thick with a sense of foreboding that you can cut it with a dull butter knife. Maybe there are too many things going sideways clouding investor judgement, but things could turn nasty in a heartbeat.

With the worrisome prospects of US tax cuts have a much shorter shelf life than expected and with the asynchronous global growth sinkhole expanding, equities will have no place to go except into the tank taking global risk sentiment along with it.

With nary a silver lining to be had, we could be in the early stages of a protracted equity market meltdown. These market moves as more than just a classic case of risk aversion; this is time to stop looking at markets through a rose-coloured lens.

Oil markets 

Bargain hunters are emerging as traders will go back to the well on the first sign of risk stabilising given the macro sell-off has been a critical catalyst in energy prices this week. But in this risk-off environment, it feels as if this strategy is like sticking your tongue to a frozen flagpole hoping something good is going to come of it.

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US Markets

Not the best note for US  equity markets at the Bell. 

*DOW JONES INDUSTRIAL AVERAGE ERASES GAIN FOR THE YEAR

*S&P 500 INDEX ERASES GAIN FOR THE YEAR

It’s clear as a bell, despite the market daily mood swings, risk aversion has a stronger grip of markets than risk-on. And today was no exception as risk continues to trade off the back foot.US markets are perched precariously on the edge while trading all-important pivot levels. With the S&P and NASDAQ having been  drawn into the global equity maelstrom, the US bellwethers are no longer the invincible Titans that have held up global  market sentiment for what seems like an eternity as investors flocked to the tech sector given it was relatively impervious to weaker global growth sentiment, but escalating US-China trade tension remains that sectors undoing. With China-US trade hopes fading as both sides appear to be digging in for the long haul things could get blustery in a hurry. Indeed the sharks are circling

In a classic case of risk aversion, US 10y yields are back down towards 3.11% and USDJPY, 112.15. However, the dollar is much stronger across the board after the EUR breached the 1.1430 pivot that was on virtually every G-10 trader’s radar, but the bulk of the dollar demand was through EM, EUR and AUD

European Markets 

ECB President Draghi gets his chance to throw a few curveballs today. But it will be hard for the ECB to ignore eight solid months of decline in EUR PMIs which is directly attributable to weaker growth in China and the political quagmire in Italy. While the markets are expecting little change in ECB’s policy, but their outlook will be closely watched more so after yesterday soft PMI data. All in all, this adds more bricks to the global equity markets wall of worry.

China  Markets 

Very confusing price action yesterday a tug-of-war between two competing narratives with Beijing’s obvious desire to boost sentiment through private sector initiatives while the plentitude of geopolitical headwinds kept overall bullish sentiment depressed as markets remain entirely pessimistic to buy the China growth story knowing full well US-China trade tensions continue to escalate.

Oil Markets 

The  EIA data for last week didn’t confirm the 9.9 mmbls build from Tuesday’s API data, but the 6.3 mmbls increase was approximately double the market expectation and more than the 3.1 mmbls five-year average gain. The build came despite a further 398,000 bpd increase in US crude oil exports to 2.180 mmbpd.

But digging into the data, while the confluence of EIA inventory is bearish for WTI, it’s bullish for products with total petroleum inventories declining 9.2 mmbls on the week so supportive for the oil complex on a net basis. Which sparked a mid-NY session surge in prices only to be completely faded

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(EIA Website data)

However, the macro sell-off has been a critical catalyst in energy prices this week. The energy complex still holding long positions but oil markets are getting drawn into the risk aversion vortex as traders adopt the “everything is coming off’ mentality. But with the plethora of negative macro crosscurrents, it does suggest riskier assets will struggle as equity markets continue to wobble. Suggesting oil markets will be increasingly susceptible to broader market mood swings. Also, we’re seeing physical weakness getting expressed in product markets in late NY session, and that is negatively impacting oil prices into the NY close.

Predictably, there’s a lot of headline noise ahead of November 4, but the one bit that continues to resonate is Saudi Energy Minister Khalid al-Falih said on Tuesday that Saudi Arabia would step up to “meet any demand that materialises to ensure customers are satisfied”. And when factored into the weakening macro and technical picture, it suggests that a top may be in and lower levels are likely in the weeks/months ahead. There are just far too many negative cross-asset signals to hold a bullish view on risk. Not to mention the negative runs of weak economic data in Asia suggesting regional OIl demand will stall as we could be entering a protracted phase of the expanding global growth sinkhole. Indeed oil markets are nearing a tipping point.

None the less, expect bargain hunting to emerge as traders will go back to the well, hoping that the worst of the worst has been priced in and there is still a significant bounce higher to be had as we draw closer to Iran sanctions. Bu this view all boils down the spare capacity equation and how many barrels can Saudi deliver.

Gold Markets

The strong US dollar continues to have an influence but the resulting gold dips should prove to be excellent entry points to buy gold even more so with equity market putting in lows, but if these levels give way,  Gold will shot significantly higher. The stronger USD dollar is more about a weaker EURO profile than anything else after the very dismal EU  PMI prints rather than  USD haven appeal. But in these extremely moody markets, its all about holding one’s nerve especially if you have a negative equity view. Continue to favour gold higher in the weeks ahead especially as we get closer to US midterms as gold traders remain singularly focused on equity watch.

Currency Markets

There are no directional trades to be had instead the currency markets have devolved into a chop fest around data prints. Participation remains quite low but the main focus of the week will be Thursday – Vice Chair Clarida’s speech on the economic outlook at 12:15 EST.

EURUSD  finally broke the 1.1430 after the Eurozone composite PMI declined to a 25-month low, indeed a daunting number for the few Euro bulls left in the markets. While USDJPY is trending lower as the intensive flight to safety is on.

The Malaysian Ringgit 

Regional sentiment continues to shift between Beijing interventions and the numerous headwinds to trade and global growth, but regional risk sentiment remains very nervous about buying into the China growth story keeping local equity sentiment sour

I expect  USDMYR to continue nudging higher and will test 4.18 levels in the not too distant future perhaps even sooner if oil prices continue to slide.

But overall a very pedestrian day for the MYR.

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China risk 

Shanghai index is showing some moxie in early trade as perhaps investors continue to expect the Pboc and mainland regulators to provide a more convincing backstop given that they have only tapped into a tiny part of their monetary and fiscal war chest. Of course, we shouldn’t read to much into what is probably little more than a short covering rally as local trader remain much better sellers of risk.

China-US trade negotiation hopes are fading, with both sides now looking set to dig in for the long haul. Asian investors should anchor themselves to the nearest gold bar and hold on until these blustery market conditions abate.

USDCNY fixed at 6.9357 today, +19 pips from last fixing and -17 pips from the previous closing at 6.9374 on 16:30 Beijing time. A touch higher than market expectations, but fixing has been unable to rouse CNH bears that are suffering a severe case of fatigue. But the market remains firmly on buy the dip mode

But the elusive silver lining is hard to come by given the confluence of negative global drivers, as  sell on rally continues to permeate every pocket of global equity markets

Oil update

Oil bulls are not letting go of a possible Saudi retaliation after oil prices have caught an early bid in Asia as President Trump vows ‘some retribution’ for Jamal Khashoggi’s death. Suggesting to the degree that escalating middle east geopolitical risk is playing a part in the oil price equation.

Indeed, with middle east geopolitical embers glowing, there could be an impact on oil supplies if neighbouring sparring partners start to compete for the regional influence which could ignite the always fragile political balance in the middle east.

Oil markets remain extremely noisy in the run-up to the US Iran sanctions day of reckoning.

Ultimately, however, given that Saudi Arabia is looking to diffuse political tension, the recent rhetoric from Saudi Energy Minister Khalid Al-Falih does suggest the Kingdom may be willing to oversupply markets short-term needs not just adding barrels to meet Iran and Venezuela shortfall, and supporting the markets shift to a bearish oil market view.

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When the (equity)walls come tumbling down

What started as an innocent equities correction in Asia, spilt over into the NY session as classic risk-off unfolded as US yields dipped with oil and gold prices rocketed higher. Risk sentiment is on its back foot this morning with global equities and commodities weaker. The catalysts are nothing new and are a toxic geopolitical cocktail of nagging concerns: i) Chinese growth levels (despite their recent stimulus), ii) lack of progress on Brexit (despite reports that a deal is near), iii) the Italian budget issues and iv) the Khashoggi investigation. But significant for global equity investors, the US equities Teflon persona was seriously questioned as price action suggested there is one asset class investors fear: equities. And like migratory birds heading south for winter, the icy chill enveloping global stock markets has sent investors flocking to safe to haven assets.

The writing was on the wall when equities traded weaker across the board after Monday’s intervention induced rally in Chinese stocks had little effect on global sentiment and reversed sharply lower in yesterday’s Asia session.

But for me, it was the Bloomberg headlines that suggested the PBoC plans to give CNY10bn to bond guarantee firm China Bond Insurance to provide credit support for debt issuances by private firms, that sent off alarm bells rather than support equity markets. Often these types of interventions suggest much deeper rooted economic issues and as we saw from yesterday action can trigger a negative backlash.

With the S&P now drawn into the global equity maelstrom, gold and bonds are the safe havens, not king dollar which is trading slightly weaker if anything from yesterday with USDJPY leading back towards 112 and EURUSD failing to break through 1.1430 . A  move lower in US equities does create haven flows and gives the greenback very mixed feelings about it. But with so many crosscurrents swirling, Italy and Saudi fears when combined with US domestic concerns over what has suddenly become a collapse in the housing-related asset has made for a toxic combination sending equity investors packing who are now expecting a much bigger fire sale before re-engaging as risk aversion feels like it has much further to run.

Still, with no key US economic data for markets to tether themselves to, buckle up as there are a plethora of potential potholes to navigate on Wednesday in the form of an expected Bank of Canada rate hike PMI prints for EUR, while USD sees Fedspeak and a fresh Beige Book. A hawkish Fed lean will add more fuel the already raging market fires.

And finally, if you don’t think China-US hopes are fading, with both sides now looking set to dig in for the long haul markets could get much worse before better . Asian investors better hold on to their hats, as markets are about to get extremely blustery.

Oil Markets

The long oil contract unwinds continued with front-month WTI -and Brent plunging more than 4 % in heavy selling on the combination of macro weakness, and more headlines from Saudi Arabia about their ability & willingness to increase production are the primary catalysts. Indeed, the petroleum complex extended their slide after Saudi Energy Minister Khalid Al-Falih stated that OPEC’s current policy was to “produce as much as you can” to reassure customers that they are ready to meet “any demand that materialises.”
Let’s not make any illusions about this shift in Saudi policy; this is about oversupplying markets short-term needs not just adding barrels to meet Iran and Venezuela shortfall and this nascent shift in Saudi policy could translate into a much more significant impact for energy markets.

US weekly petroleum inventory data did little to stem the tide after the American Petroleum Institute (API) reported a massive build of 9.88 million barrels of United States crude oil inventories for the week ending October 19, compared to analyst expectations that this week would see a hefty build in crude oil inventories of 3.694 million barrels. Threatening a deeper free fall as whatever bullish remnant remain are heading for the exits.

Gold Markets 

Gold is following Yen and US Treasuries, of course, risk aversion is in play. But frankly, we’ve been dealing with this for months, the difference this time around is the US dollar does not have a go-to haven appeal it had from escalating trade war tension. The latest Gold Rush is a direct result of tensions between the US and Saudi Arabia and increasing nervousness about risk assets. Increased US -Saudi strains has middle east geopolitical embers burning and gives rise to the notion that regional sparring partners will compete for the influence which could ignite a middle east powder keg. While the Gold market still fears the Feds, however on a broader and more pronounced equity rout, this will bring the Fed December rate hike into question. Gold prices were unable to hold gains after testing above 1234-36, but traders remain on watch given US equity markets weaker complexion.

Currency Markets

Despite all the market hoopla, G-10 moves were very pedestrian suggesting as we have thought all along, currency markets are suffering a bad case of trader fatigue.

The Malaysian Ringgit: It’s hard to find a silver lining in the market with global risk sentiment going into the tank and oil prices following suit. With the upcoming budget looming ominously, it suggests the Ringgit will continue to trade with a defensive posture.

The Pound is entering that mode again, where no position is a good position as the negative headlines continues to compound extremely negative sentiment.

The Yen rallies on haven demand, but tremendous support remains at 112 which should keep USDJPY downside in check at least until the traders have then next negative equity mood swing.

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A sharp drop in Chinese stocks led global markets broadly lower on Tuesday, as investors digest the impact of trade tensions on the country as well as other geopolitical worries, such as Italy‘s debt problems.

After the Shanghai index closed down 2.3 percent at 2,594.83, European markets traded lower. Germany‘s DAX slipped 1.8 percent to 11,321 and France‘s CAC 40 was 1.3 percent lower at 4,990. Britain’s FTSE 100 lost 0.7 percent to 6,991.

Wall Street is forecast to open lower, with the future for the S&P 500 down 1.1 percent and the Dow future off by 1 percent.

“Risk aversion continues to permeate every pocket of the markets whether triggered by President Trump’s latest tweets on immigration or the blustery headwinds from Riyadh to Rome,” Stephen Innes of OANDA said in a commentary.

ABC News USA

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Markets remain shrouded in a thick blanket of risk.

The USD outperformed on Monday on the back of Italy and Brexit risk while the mere utterance of a protracted equity correction remains a highly sensitive topic that investors fear could morph from a wall of worry into a towering wall of pain.

Risk aversion continues to permeate every pocket of the markets whether triggered by President Trumps latest tweets on immigration or the blustery headwinds from Riyadh to Rome; markets remain shrouded in a thick blanket of risk.

For the most part, US equities struggled overnight and were unable to hold on to Shanghai Composite Index intervention induced gains as US banks toppled the most while energy producers struggled as crude prices hit a five-week low.

But looking ahead today, it seems like a quieter docket than usual, but trader remain on headline watch ( as usual)

Oil Markets

Oil prices are pointing lower again with the Saudi credit default swaps ballooning as the market becomes incredibly uncertain if there will be a shift in power when the Crown price is directly linked the Khashoggi murder.

The market turned offered again after Saudi Energy Minister Khalid Al-Falah, likely in an attempt to diffuse geopolitical tensions, said production would soon increase from 10.7 million barrels per day to 11.0 as part of the ongoing effort to offset the impact of US sanctions on Iranian crude oil exports. Of course, digging into spare capacity does raise future concerns in the face of another significant supply disruption.

It is no sure-fire proposition that the kingdom’s reserves will be enough to offset the enormous loss of production from Iran and Venezuela while leaving market ever so delicately balanced and prone to any supply disruption as other the Middle East concerns, North and West Africa remain hotspots in months ahead. And with traders all too aware that we are little more than one supply disruption away from upsetting the supply and demand apple cart and shooting oil prices higher yet again.

While the Khashoggi saga appears to be far from over the thoughts that US-Saudi tensions could lead to a supply disruption are but a distant memory.

Nearby November WTI futures expire in NY, so position squaring amid thinner volumes were the primary focus there today, but the contracts did coat trail prompt Brent lower none the less.

Gold Markets

Gold came under pressure overnight as freshly minted long equity hedge positions were squeezed by a stronger USD and despite Brexit and Italy concerns global equity markets did get some traction from China markets after verbal intervention suggests officials are prepared to stimulate the economy, including deeper cuts in personal tax rates. And while it’s easy to be cynical about the longer-term impact of this type of Chinese intervention it nearly always works over the short term, so gold prices conceded some gains.

Currency Markets

The British Pound
Overnight headlines brought a lot of PM May pushbacks. Acrimony within her party is, of course, a massive barrier that might ultimately result in a leadership battle, The Telegraph reported that a Eurosceptic amendment was gaining traction in Parliament ahead of Wednesday’s discussion; but so far that bluster seems to have faded. Sterling bids were in short supply overnight after GBPUSD breached the 55d MA (1.2990). But for the time being there appears to be some support structure lurking around 1.2950 that are keeping the Pound bears at bay.

The Euro
Of course, the EUR has its worries with Italian budgets, but with chatter, the  ECB may push back its 2019 outlooks to the December meeting, it does suggest the current European political malaise might weighing on policy sentiment

The Australian Dollar

China risk rallies but the Aussie dollar doesn’t. Look no further than the mulishly sticky USDCNH that remains tethered to the 6.94 and the Australian government’s fragility taking centre stage. Mind you I’m trying to figure out when the Oz government hasn’t been in a fragile state as this seems to be the norm down under.

The Malaysian Ringgit

Uncertain global risks slippery oil prices and pre-budget malaise has traders for the most part sidelined. The next focus is no tomorrows CPI but given the tepid inflation readings this year, its unlikely to shift the dial from the markets more dovish read on future BNM policy.

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US  Markets

From sandstorms in Riyadh to headwinds in Rome, escalating risk has effectively capped the recent swell in US Treasury yields, while the combination of Federal Reserve policy tightening and increasing debt supply should keep the trapdoor from giving way. But none the less, market participants will jostle between US growth momentum and the ever-threatening and escalating geopolitical risk, that could trigger a more significant flight to safe-haven currencies and assets.

US equity markets struggled across the finish line on Friday as investors contiued to take profits after morning gains gave way when a report showed U.S. home sales fell for the sixth month in a row. US housing growth continues to disappoint on familiar themes and remains one of the few red lights and the most significant drag on the US economy.

China Markets

Although local Asia sentiment remains poor, the SHCOMP staged an impressive reversal of Friday after China rolled out a series of speakers and rule changes to stabilise markets, but the pace of reversion does suggest it was aided on by state-owned funds to add some vim.  But Chinese markets remain under pressure from every economic angle leaving more than a few investors extremely sceptical Friday’s recovery will have lasting legs.

Oil Markets 

It should be a hectic week ahead in oil markets anticipating colossal participation amidst escalating headline risk this week . Bullish sentiment is clearly under pressure as oil traders search for  the next equilibrium.

Brent crude oil probed back above the $80 per barrel on Friday after China reported record refinery throughput for September.Reuters But the critical benchmark still closed below that technically essential and psychologically significant level. ($80 per barrel)

West Texas Intermediate crude oil followed stronger performances in the Brent market, but like Brent, closed below a key level, $70 per barrel, which is a significant fail for bullish sentiment

In China, higher seasonal demand and suspected stockpiling are occurring, while similarly the US and the OECD continue building stockpiles ahead of potential supply disruptions this winter. But China demand is also surging due to Beijing ‘s enormous infrastructure projects and spends which are being used to stimulate the economy and is beefing up Oil demand.

However, concerns about demand growth slow down along with the prospect of more barrels  coming online has triggered a sizable reduction in bullish markets structures, the difference between bets on higher prices and wagers on falling priced — dropped  14 per cent to 242,855 futures and options in the week ended Oct. 16, according to the U.S. Commodity Futures Trading Commission.

But there’s a loud level of headline noise that seems to pop up like clockwork, where on the one hand views suggest OPEC can quickly cover the Iran shortfall while conspicuously well-timed documents continue to surfacing claiming that OPEC and its allies are having difficulty boosting production by 1 million bpd as it had promised in June. Sifting through the market noise will present its challenges none the less.

From various industry insider reports, Iran exports have fallen from 2.2- a million barrels per day (m b/d) in 1H’18 down to an expected 1.5-m b/d in October. Saudi Arabia has reportedly ramped production to 10.7-m b/d though. They could go to 11-m b/d and draw down 0.5-m b/d from inventories or even more if needed. (3-m b/d just boosted Saudi export capacity at Aramco’s Red Sea Yanbu terminal. Ras Tanura capacity is well above current export levels.) And Russia still has ~0.2-m b/d spare capacity to reach 11.5-m b/d.

According to industry reports, Canada’s crude production was ~4.6-m b/d in August, with Jan-Aug growing ~280-k b/d y/y, even with Syncrude upgrader problems, which has since recovered. Oversupply and US refinery maintenance have put WCS and Syncrude into a massive   discount WTI  pipeline bottlenecks meaning more and more WSC needs to be shipped by rail with new longer-term rail shipping contracts agreeing to at ~$20/bbl to the USGC

And with Trump’s acknowledging that Saudi Arabia’s findings behind the Khashoggi death were credible, this could offer more opportunity for the US administration to pressure the kingdom to tap its spare capacity resources before the Iran sanctions take effect in November. So, there will be an intense focus on the Saudi Royal family’s relations with the Whitehouse this week, while US Congress will face increasing pressures to block all arms sales and deliveries. All the while  global business leaders continue to shun “Davos in the Desert.”

US-Saudi relationships are vital to maintaining peace in the middle east and must continue, however, the Khashoggi case will give the US leverage and which will likely cause Saudi Arabia to increase oil production if possible. But you know this is not going to leave the headlines anytime soon as most everyone considers the official Saudi explanation as a complete fabrication.

While the supply-demand equilibrium remains fragile, the anticipated impact from Iran sanctions is diminishing as prompt Brent remains in good short-term supply despite growing uncertainty about supply disruptions continue to build down the road.

Gold Markets

Investor sentiment is much-improved from even a week ago on increased portfolio hedges against more sustained equity market drawdown which over the short term,  should give rise to haven demand and boost Gold prices.

But China has rolled out some rule changes to stabilise markets. And while the longer-term effects from these changes amount to little more than putting a band-aid on a broken leg, the generally usually work and have some influence over the short term. Since  China equities are deep in oversold territory, there is lots of room for a bounce in local markets which has clipped momentum in Gold markets as even headlines around Brexit, and the Italian budget was more positive heading into the weekend. heading into the weekend although most traders remain a bit cynical on those fronts

While the upcoming US election will offer up many challenges on US political risk front and support Gold, ultimately however past Nov 6 USD and Fed hiking cycle are likely back in the driver’s seat for bullion pricing. While mainly priced in, the USD could strengthen ahead of December rate as higher US interest rates and a stronger USD could discourage gold investors from pushing the envelope higher unless of course, the equity market rout continues.

Currency Markets

From sandstorms in Riyadh to headwinds in Rome, escalating risk has effectively capped the recent swell in the US in Treasury yields, while the combination of Federal Reserve policy tightening and increasing debt supply should keep the bottom from giving way. But none the less we will bond, and currency traders are left to jostle between US growth momentum and tightening global risk, that should trigger a more significant flight to safe-haven currencies and assets.

Last weeks FOMC minutes reaffirmed the Fed’s hawkish lean and should keep the dollar supported. Markets remain in pins and needles of the Italy budget and Brexit stalemate, but with equity markets volatility on the rise, traders will continue to assess China policy adjustments on Friday to see if the moves will have a sticky effect.

Traders will soon factor in US midterm elections where the tail risk clearly, is a Democratic sweep. Mind you; its anyone’s guess just how economically active GOP tax cuts will be in 2019 while facing a massively ballooning debt. But it is while is more clear-cut that  a Blue Wave tsunami would dent market sentiment and likely push the dollar lower

The Euro

So far ECB policymakers have remained somewhat mute on Brexit, but one would think this divorce will not play out pretty for either the EU or UK economies which might influence ECB policy guidance. But EURUSD is back above 1.1500, reflecting quietening in alarm bells over equities & Italy. Moody’s finally cut Italy’s ratings to Baa3 as expected. Italy’s banks are vulnerable because of the high proportion of the country’s bonds they own, but this was widely expected so no major surprise.

The Canadian Dollar

The CAD miss on CPI has overwhelmed whatever remnants of bullishness I had in the CAD. The shocking miss on the CPI has shattered my confidence on next week’s BoC. Given there are no significant data releases between now and the BoC meeting, its time to stop being so unabashedly bullish on the loonie.

Australian Dollar There were around $A10B of Australian government bonds redemption on October 21 and given much better yields away, unless so governed to buy Australian Bonds, most of those maturing investments likely funnelled into US or other much higher yielding bonds. Thus, the AUD is holding up well despite a lot of selling pressure last week and could outperform this week provided China volatility continues to ease after mainland regulators policy tweaks on Friday.

Been avoiding trading AUD vs the USD like the plague but given shifting sentiment on BoC policy next week, the long AUDCAD trade could see some appeal early this week.

On the energy front, multiple news sources have confirmed that Australia’s colossal and much delayed Ichthys liquefied natural gas (LNG) plant has started shipments in recent weeks. But comes at a favourable time and could offer some much-needed respite to Australia’s dwindling heavy sweet crude oil production.

It still feels like risk off but with a less weak Yuan and the monetary policy easing story in China playing out well on the SHCOMP. While the mainland equity recovery was positive on the surface, other regional bourses barley blinked as the China market reversal was little more than it a short covering.

In what could best be described as hope for the best but prepare for the worst. Malaysia slashed its economic growth targets and deserted its plans to balance its budget by 2020, not exactly a ringing endorsement for the financial in Malaysia. And with capital gains taxes and other consumption taxes on the horizon, it’s not to difficult to figure out why Malaysia equity markets remain under pressure.

The combination of macro risk off as well as on-shore danger around the upcoming budget will keep the Ringgit trading defensively.

The leak on oil prices notwithstanding, regional risk sentiment remains ever so fragile as any sliver of optimism from US earnings gave way to that reality that trade tension and geopolitical unrest continues to gurgle. There were around $A10B of Australian government bonds redemption on October 21 and given much better yields away, unless so governed to buy Australian Bonds, most of those maturing investments likely funnelled into US or other much higher yielding bonds. Thus, the AUD is holding up well despite a lot of selling pressure last week and could outperform this week provided China volatility continues to ease after mainland regulators policy tweaks on Friday.
Been avoiding trading AUD vs the USD like the plague but given shifting sentiment on BoC policy next week, the long AUDCAD trade could see some appeal early this week.

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Global markets are enveloped in a classic case of risk aversion.

Global markets are enveloped in a classic case of risk aversion with all the main risk off hallmarks showing up in virtually every corner of the market. The S&P is down below the 200d moving average, FX carry is very wobbly, and  US 10y yields have corrected lower. Taking their cue from Asia markets North American traders read negatively into the USTR’s focus on China rather than the fact the report didn’t step on anyone’s tail. But the painfully raw price action from BTP-Bund spreads widening to a five-year high  triggered the latest  freefall  as risk assets virtually melted across the board

This week’s US earning inspired equity markets rebound is but a fleeting memory and has given way to the  lurking reality of bubbling trade-tension, geopolitical unrest, Italy risk and a hawkish fed narrative.

I guess when the Charmian of the world most powerful Central Bank views the US economy in the context of ‘remarkably positive outlook’ it’s probably not a great idea to assume the FOMC will walk back any hawkish interpretation.

While the US markets have been somewhat insulated from China equity market meltdowns this year, that strong historical correlation that “when China sneezes the rest of the world catches the flu” is starting to take hold. But things could get worse as the Yuan depreciation train could be arriving at the station anytime soon. Indeed, USDCNH warrants a high degree of attention as the test of the vaunted seven level looks increasingly inevitable as based on current price action more CNY/CNH depreciation is in the tea leaves.

And for good measure, not that I’m overly superstitious, but for the Chinese, number 7 can also be considered an unlucky number since the 7th month (July) is a “ghost month” and homophonous with death.

Yuan

Are markets prepared for the destabilising effects of a rapidly weakening Yuan as we draw ever so ominously near another leg of RMB depreciation?

In the wake of a few dubious Yuan fixings of late, the Pboc are indicating a more lenient stance towards RMB depreciation.

The CFETS index has broken the 2017 low of 92, which may suggest more CFETS depreciation is necessary given further tariff threats, but the lack of capital inflow is what telling which is naturally weighing on support for the RMB, all of which is suggesting the depreciation train is nearing the station.

Oil Markets

EIA Weekly Petroleum Status Report was a complete shocker sending Oil markets spiralling lower amidst some concerning development for Oil bulls.

With risk sentiment going into the tank and investors rehearsing worst-case scenarios around the asynchronous global growth sinkhole. Compounded by China contagion fears, there was hardly a bid to be found in New York markets. This significant price action and discovery suggests traders are no longer concerned about how high price will go but rather how quickly they will fall, as for today at least the bid on dip mentality has run for cover.

With any notion that  Riyadh would cut output and push oil prices higher a distant memory, Tanker Trackers data showing that Iran’s oil exports in the first two weeks of October were 10% higher than September averages compounded by massive worldwide inventory builds as the so-called ‘ hoarding effect” intensifies  Not to mention increasing chatter that Saudi Arabia will increase production. What appeared to be a ” sure-fire bet” for supply shortfalls when Iranian oil exports drop significantly in November, it’s has morphed into a bit of a white-knuckler of a trade.

On the bright side, however, since I remain unabashedly bullish on oil markets. So, after an 11 % fall and subsequent shake out in a mere two week, positions are much cleaner, and the fear of getting caught up in the crowded trade mentally heading for the exits has receded considerably. So it could be time to step back up to the plate. You know the old saying, no pain no gain!

Gold Markets

Gold prices are for the time being are held back by the stronger USD. But the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst still make gold appeal a favourable tail hedge against these escalations. Despite the FOMC minutes cementing the Feds rate hike view, the US midterm elections to pose a significant headwind for both the USD and US equity markets as such Gold should remain a favourable hedge over the short term.

Currency Markets

Nothing else matters but the RMB (Rinse and Repeat yesterday currency view)

Chinese authorities are a lot more sensitive about the RMB on a trade-weighted basis rather than on a bilateral basis against the United States, and with the markets trading at the bottom end of the CFETS basket range, there will be more focus on the basket after two specifically odd fixes towards the end of last week. So, the debate rages if last week is a signal for a shift in policy. If authorities decide to let this CFETS level go, it will open a massive can of worms that should see USDCNH rocket higher and will have a positive knock-on effect for the USD.

Regardless of which direction the USDCNH moves the RMB will remain at the epicentre of currency markets and will drive the near-term direction of the dollar.

So, for local ASEAN currencies, I suspect they too will be held hostage to the RMB moves.

The Euro 

The Euro is worth noting as  EURUSD was dragged down on broader USD sentiment, but events of its own made it worse. Troubling Italian news hit one hour into the London close causing a calamitous meltdown in EU risk

Media

Join me on Channel News Asia this morning at 7:30 AM SGT to review last nights price action Channel News Asia

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The Yuan

USD bullish sentiment post FOMC minutes outweighs Treasury to report the CNH playbook remains intact and should not provide any is a significant short-term relief for local EM currencies. High US bond yields and a rebounding US dollar continue to pose substantial headwinds.

The Yuan fix came in at 6.9275 vs 6.9235 but +30 higher than market estimates. Given the focus on all things Yuan, it has triggered a call to action for Yuan bears who have promptly paid the USDCNH market above 6.935 level during the opening salvo. The higher fix combined with no bounce in China risk sentiment post US Treasury FX Report does provide some ammunition for CNH traders to push the USDCNH envelope higher. Expect the near-term battle line to get drawn between the critical USDCNH 6.94-95 level.

Regional equities market

Taking their lead from an unsettled close in US equity markets, local markets are trading with a negative bias as risk aversion continues reverberating across ASEAN bourses. President gone postal, escalating US-China tensions and a stronger USD will pose considerable headwinds to local equity markets. Unlike yesterday rally where participation was relatively light, early volumes are looking robust suggesting investors continue to probe markets downside where more significant tail risk remains.

Australia jobs report

AUD jobs data far from a game changer +5K offset by fall in participation but UE rate still decent so confident on the margin. But given the volatile nature of this report, the data will carry a limited impact on RBA policy. With US-China tension staying on the boil AUDUSD markets remain better offered than bid.

Malaysian Ringgit and Oil prices

Oil prices are leaking lower; the Malaysian Ringgit should underperform at the margin today or at minimum trade with a defensive posture. We do not see any discernable bounce in local risk sentiment as the markets prepare for capital gains and consumption taxes.

Bank of Korea 

The Bank of Korea leaves 7-day Repo rate unchanged at 1.50, but we wait in vain to see if this is indeed a hawkish hold. But USDKRW has moved back above the 1130 level as fast money speculators pile in after the BoK decision to hold rates. We wait to see if the central bank will provide an evident signal for a hike in the next 1-2 months. The press conference begins at 10:45 SG time.

Gold

Gold continues to find a bid in early trade as local traders are a much better seller or risk. But with the dollar breaking below the critical 1.1500 EURUSD level near-term bullish sentiment will be tempered but given equity weakness gold is looking increasingly attractive as a defensive hedge.

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