Asia market update: a busy session is unfolding

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.

Asia market closing view: fumbling into the EU summit

Currencies 

Currency markets have been relatively quiet in Asia ahead of the US Treasury FX report an no doubt markets will be eager to view the FOMC minutes where there is a considerable risk for a hawkish lean. Even more so after the subtly hawkish warm-up ahead of tonight’s FOMC minutes delivered by San Francisco’s new President Daly which is creating some noise today but turnover light. Long USD is not my base case view given the upcoming US elections risk, but a hawkish affirmation of Fed policy in the minutes will probably send the dollar bears back to their cages for the rest of the week and provide a boost to US dollar sentiment.

Gold 

Gold prices have reversed earlier losses as the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst make gold appeal a favourable tail hedge against these escalations. 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.

Oil prices 

Oil prices have been steady in Asia but remain primarily supported Iran sanction as traders await the final EIA weekly petroleum status report due out later in the US session.

Equities

Not too surprisingly the effervescent bounce back in Asia equity sentiment has cooled as markets fumble into the EU summit But the enormity of global risk suggest the isolated US growth theme will come to an end like synchronised global growth theme, at least until US-China trade dispute is settled. On the trade war front especially, it’s too early in the game to build up Asian equity position with that enormous weight hanging over market sentiment.  Although markets did rebound in Asia, participation an turnover was that big.

But with FANNG earings showing a solid result yesterday, US equities should hold up ok today.

US Treasury FX report 

There may be too much overconfidence due to the recent equity market meltdown, that the President will accept the US treasury decision not to call China a currency manipulator. There’s a significant tail risk if the President doesn’t recognise the US Treasury findings at face value which should see the RMB complex sell off and equity markets buckle as trade war tension by implication will rocket significantly higher.

Brexit 

While avoiding all the headline bluster as much as possible, regardless I do not think the market will adjust their Brexit view until it is an obvious done deal because it is hard to PnL fissures to due headline risk. For some, that that will keep them sidelined but for those wearing UK risk or the few brave souls considering entering the mix, it could result in one of those rare home runs in both currency and rates markets for the not so meek of heart. This is as close to a real money dream set up as you can get in today’s market

President Trump 

US President Trump is out with another headline, which is creating some financial markets waves. “My biggest threat is the Fed,” Trump said on Tuesday during an interview with FOX Business. “Because the Fed is raising rates too fast, and it’s too independent,” he complained. Of course, nothing new but this noise does tend to make market participants extremely nervous when the Presidents do question the Fed mandate while wading into waters Presidents have typically considered out of bounds, specifically the Federal Reserve Boards independence.

But in the all too familiar good cop, bad cop routine is back in play. The frequency Fed-bashing has increased in recent days. US Treasury Secretary Mnuchin has also tried to comfort market participants at times by saying Trump respects the independence of the Fed.

Asia market update: Focus on Yuan

You just know that something good is going to happen

Live FX Market Analysis – 16 October 2018 (Video)

It’s been another turbulent week in FX markets with last week’s sell-off suitably spooking investors, Saudi Arabia causing a stir following allegations of murder at its embassy in Turkey, Brexit talks stalling and Italy risking the wrath of the European Commission after submitting its budget. Senior Market Analyst Craig Erlam discusses all of these and more in this week’s webinar.

Craig also gives his live analysis on EURUSD (16:37), GBPUSD (18:09), EURGBP (20:05), AUDUSD (21:56), USDCAD (24:25), GBPCAD (29:37), NZDUSD (30:14), USDJPY (31:05), GBPJPY (31:50) and EURJPY (32:40).

Rethinking it

Rethinking it

Risk sentiment stabilised primarily on the back of reports that the Treasury Department will NOT recommend China be labelled a currency manipulator along with headlines that Trump and Xi will meet on trade seems to be enough reason for the equity sell-off to cool. But indeed never has so much been riding on the contributions of so few. 

Once again market sentiment is being driven by rhetoric from US administration and Trump himself who has been quick to point fingers at just about anyone and everyone. Whether its the Fed has gone crazy, OPEC is causing an oil spike, China at fault for trade tension and declaring his policies are hurting China.  But from my chair, the message is loud and clear,  all designed to stir his support base into a frenzy ahead of the November midterms.

It ain’t over till it’s over

Initially, the market was interpreting higher US rates as a signal to deleverage given that most of the economic expansion was assisted by QE, both in the US and globally. So draining the punch bowl and tightening rates were weighing on sentiment. Ok, we get that! But gradually moving interest rates higher in themselves are not necessarily a bad thing for markets especially coming off historically low rates. Most market participants have never traded a rate hike cycle, and for some of the dinosaurs, it appears they have forgotten what rate hike cycle is. When in fact it’s the moment the Feds shift toward a dovish defensive stance after a period of tightening is the time to worry! Presumably, the Federal Reserve Board tightens when the economy is on hot, and the eases when it’s not.

Maybe and just maybe investors are waking up to the fact that much of this market frothiness is a result of financial engineering aided by the intravenous drip of seemingly endless supplies of cheap money. The result could very end up being a stock market built on a leveraged House of Cards which is about to topple after the US tax cuts have run there course. Indeed, credulousness may be giving way to the facts on the ground.

The possible Fed implication

If the equity markets continue to fall into December, the Fed will most certainly consider pausing raising interest rates. You can imagine what type of signal that will suggest to investors who in the face of soaring equity valuations, escalating global trade tensions and divergence in the whole growth narrative especially now that their fingers are glued to the sell button after last weeks carnage. And while the bar is exceedingly high for the Fed to pause in December, it’s not as high this morning as it was a week ago!

Oil Markets

WTI prices have shot higher at the NYMEX futures open after Saudi Arabia warned Sunday it would respond to any “threats” against it as its stock market plunged following President Donald Trump’s warning of “severe punishment” over the disappearance of Washington Post contributor Jamal Khashoggi.

Given that oil supply is Saudia Arabia ‘s” ace in the hole” The Kingdom has motioned it could use oil supply as leverage against any sanctions.  Another geopolitical hotspot for the US administration to navigate but this one extremely testy given that President Trump has been pressuring Saudi to up supply to counter the US-led Iran oil sanction

Despite oil prices making a fast retreat last week and e global growth downgrades at this week IMF in Bali.  The spare production capacity argument should continue to support oil over the short term. The IEA pegged spare capacity at around 2 million barrels per day. But the markets know these reserves have never been tested raising the questing how much spare capacity can be brought online immediately But in the meantime until additional supplies are made available, that crimp in supply should be enough to support OIl prices until proven otherwise.

Oil Bears came out of hibernation last week even despite falls in Libya’s crude output. But price actions were driven primarily by an Oct. 8 report from the IMF, in which it downgraded global economic growth forecasts for 2018 and 2019 to 3.7 per cent per annum, from 3.9 per cent, which would consequently lower oil demand. Then pandemonium was unleashed across global markets as the worldwide stock markets tanked triggering an exit from riskier assets.  And while the  S &P stabilised well and continued to roll with the punches, but Oil markets were so eager to snap back. Oil prices initially struggled 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 suggest oil stocks are at the highest level since February. While advising the markets are adequate supplies which again highlights uncertainty of supply once the US sanctions on Iran take effect. Lordy Lordy, it’s a noise market

Despite managing to eek out a win on the day, Brent was lagging WTI on Friday highlighting the lack of fundamental deficit in the oil market, with the International Energy Agency monthly Oil Market Report demand lower and terming supplies “adequate for now”.And  WTI could still be drawing support from Hurricane Micheal induced outages.

Drillers added eight oil rigs in the week to Oct. 12  according to Baker Hughes. Mainly attributed to the November 1 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.

Oil COT report 

The Commitment of Traders data, HEDGE FUND net position changes in the week to Oct 9:
Brent -6mn
WTI -37mn

Gold Markets

The precious complex is trading of the intersession highs as one would expect after the larges jump in years. In reflection, the move was a combination of a haven and full short covering. But this would leave the current landscape extremely shaky if both stocks and US rates markets recovered significantly in the days ahead. But with geopolitical noise ratcheting higher in Saudi Arabia

Currency Markets 

EURO
Given all these tectonic shift in market sentiment, currency markets have this air of unpredictability about them, not more so then the EURO as its completely unclear if Friday’s move was confirmation of the downtrend or nothing more than weekend position squaring. Talking to my circle of G-10 traders this morning I get the feeling that more are coming to a conclusion ahead of the US midterms and wobble equity markets, the USD is there for the taking. After the market’s reaction to Nikki Halley resignation when the USD sold off, its probably a sign of things to come as the pendulum swings between the GOP keeping or losing control of Congress

Japanese  Yen

Kuroda and company have been floating trial balloons the IMF conference in an attempt to gauge market sentiment and prepare currency traders for the inevitable rate hike. The BoJ   desperately wants to help Japan’s  banking sector and improve the monetary transmission mechanism channels to allow the banks to raise the cost of borrowing, after a decade of struggling

The Malaysian Ringgit 

Traders are awaiting US Treasury Department’s currency report on Monday/ Tuesday, where it rumored they won’t classify China as a currency manipulator which could avert an EM Asia currency meltdown and would forestall an escalation of the U.S.-China trade war. Oil prices look supportive in early trade but the overhang from fiscal concerns around the upcoming budget should temper any strengthening in the local note.

The IMF Bash in Bali

IMF Managing Director Christine Lagarde doubled down on the messaging.

“Our message was very clear: de-escalate the tensions,” she told Bloomberg Television in an interview, about US-China tensions. But with no hints of a resolution or fixed purpose for that matter, the parties are no closer than they were before the soiree.

 

 

Next week’s spotlight falls on the USD and the RMB complex.

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.

Asia market update

Oil update
After hitting a massive speedbump over the past 48 hours or so, Oil investors are dipping their toes back into the no less certain waters as risk has tentatively stabilised. But prices remain very firm even after DOE reported a larger-than-expected build suggesting a bit of discount in the numbers as refinery maintenance work continued to limit demand. Regardless it’s hard to sugar coat this week’s inventory report, and tumultuous week, traders are more apt to pare rather than increase risk. So, in the absence of significant headlines, we could see consolidating into the week, but with oil prices holding firm above$ 80.00, the bulls haven’t completely lost the plot just yet

Excellent trade data from China for September.
The trade balance has come at USD31.7bn versus 19.2bn expected. Exports are substantial at 14.5% YoY versus 8.2% expected, and imports have done well coming at 14.3% versus 15.3% expected. but I wouldn’t get too excited as dealers will buy this dip below 6.90 based on today fix view

Risk

There’s a semblance of sanity returning to the markets, but we are no nearer a significant recovery, but the Politico article which stated the internal report to Treasury Secretary Steven Mnuchin did not recommend that Beijing is labelled a currency manipulator has eased tension although we are not out of the weeds just yet. On the flipside, the Pboc continues to offer up confusing smoke signals as its yet another day when USDCNY and USDCNH see a big move higher. Mixed messages are confusing the landscape as again today we got another higher than expect fix which is greenlighting CNH bears to jump into the position with more belief after last night sell-off. And with the unpredictable nature of commander and chief, Donald Trump does raise the level of uncertainty; there is nothing inevitable about an escalation of his long-standing China is currency manipulator themes.

This market is exhausted from all after the most significant sell-off in global equities since Feb. Its large shake out the landscape remains no less uncertain and while the current narrative is likely to rage on until Novembers G20 summit at least, prudence suggesting keeping one’s powder dry on the recovering Friday and live to fight another day after yesterday most unpleasant experiences.

Gold Comes Alive In Biggest Jump Since ‘16 After Equities Roiled Bloomberg

Gold gains most in more than two years

Daily Markets Broadcast 2018-10-12

Pace of equities’ declines slows as Asia mulls Wall Street weakness

Asia shares pressured, but not dramatic

With the biggest one-day losses in about eight months plaguing Wall Street yesterday, Asian equities continued the bearish sentiment, though not quite to the same degree. Considering the US30 index fell 3.9%, the SPX500 4% and the NAS100 5.3%, today’s losses of 0.97% for the JP225 CFD and 2.4% for the HK33 index and 0.66% for China shares appear small by comparison.

Does this mean that yesterday’s sell-off was purely technical in nature, and thereby short term? Certainly there were no specific new headlines to induce the selling, just the usual trade wars, high US yields and Brexit, which have been with us for a few days/weeks now.

However, the SPX500 index has traded below the 200-day moving average for the first time since May 4 today, hitting its lowest in just over three months. The NAS100 index had broken through the same moving average in late trading yesterday, though the US30 index is still holding above it so far. These breaches could suggest that the current correction may have further to run, as technical momentum models may trigger more selling signals.

 

SPX500 Daily Chart

Source: Oanda fxTrade

Euro gets a leg up

The Euro was one of the top performers versus the US dollar in the Asian session, seemingly helped by talk that Italy aims to reduce its deficit to GDP ratio to 2% by 2020. Though this news was first mentioned last week, nevertheless markets appeared to relish any sign of better news. EUR/USD rose as much as 0.44% to 1.1571, the highest in more than a week, before settling back at 1.1567. A potential candlestick doji reversal pattern on Tuesday has been confirmed with an up-day yesterday and, combined with bullish divergence on the stochastics indicator, the pair has traded higher today.

In the broader market, the US dollar retreated 0.18% against a basket of six major currencies.

 

EUR/USD Daily Chart

Source: Oanda fxTrade

 

US consumer prices in the spotlight

The highlight on the data calendar today will be the release of US CPI for September. Prices are seen rising at a slower 2.4% y/y pace than August’s 2.7%, and this would be welcome music to the Fed’s ears as inflation has hovered above the 2% target level for some time.

Aside from the US CPI data, we hear speeches from Carney and Vlieghe at the Bank of England and EIA data on crude oil inventories and natural gas storage as at October 5. The US 30-year bond auction may draw attention as yesterday’s 10-year auction saw the highest yield since 2011, as demand fell to its lowest since February.

You can view the full MarketPulse calendar at https://www.marketpulse.com/economic-events/

 

OANDA Trading Podcast Market Update (11 Oct 2018)

OANDA Trading Podcast Market Update (11 Oct 2018) 938NOW

OANDA Trading podcast Oct 8 with BFM 89.9 Kuala Lumpur ,VIX in the mix

Stephen Innes, Head of Trading in the Asia Pacific, OANDA, Singapore discusses China’s central bank has reduced the required reserve ratio for the fourth time this year, as Chinese markets are set to return after a week-long holiday.

Stephen also shares his take on Treasury yields and oil prices, both rising of late.

BFM 89.9

Markets Yield to pressure?

Markets Yield to pressure?

Not so far today as the markets have opened predictably quiet with Tokyo and New York celebrating their holidays. USDCNH is trading unpretentiously higher but the USD, in general, remain little-changed post-NFP.  Strength in labour markets, and with wage growth picking up, it suggests the US versus the rest of the worlds 10-year interest rate differential will continue to widen out which should support the markets long USD bias all things being equal. However, in the absence of tier one US economic, outside of Thursday’s US CPI, the dollar won’t have much of in the way of strong US fundamentals data to anchor itself this week. EM focus is falling on Brazil elections where the Mexican peso will be used as a proxy to express a BRL   view.

Non-Farm Payroll

I’m always a sucker for game-changer hype around Non-Farm Payroll reports, but even although the headline disappointed, the inline AHE didn’t, matching August’s gain. And with the rates markets looking to fade any disappointment, however, bond traders took their cue from the unemployment rate dropping to 3.7 per cent to boost 10-year UST yields to a seven-year high and leaving currency traders, who are speculatively long USD, to calmly go about their pre-US long weekend housekeeping duties relatively unfazed. However,  U.S. stocks closed sharply lower as equity traders were left scrambling as surging US bond yields towered above the awe-inspiring   50-year low US  unemployment rate.

Equity Markets

Stocks could trade lower again this week as portfolio rotation out of equities into fixed income accelerates which could negatively impact global markets. Blue chips have been trading pretty badly ever since US yields breached multi-year levels of resistance last  Wednesday.  Indeed, this ongoing  carnage in the fixed income market combined with negative risk sentiment could shoot volatility through the roof  forcing markets into a defensive posture

So, with Vix in the mix, we could see equity markets struggle as investors reduce risk.

The Kavanaugh Effect 

Brett Kavanaugh, as was widely expected after Collins joined Flake as a yes Friday afternoon was appointed to the Supreme court. While this nod will have no market impact, it leaves the US no less divided ahead of what is expected to be firey and hotly contested midterm elections. After the Democrats’ red-hot all-out partisan attack on Kavanaugh last week, the Republican base has been invigorated while the tactics have backfired on the Democrats as according to IBD/TIPP poll Donald Trump’s approval ratings made a strong rebound.

China
China returns this week, and traders are keen to see how policymakers react to last weeks developments like the HSI’s sell-off triggered by the terrible China PMI prints, and the headline calamity around “Spy Chip” which put Chinese tech names under intense pressure. Indeed,  it will be interesting to see how the markets pick up the pieces.

But if ‘ Spy -Chip fears continue to pick up, the US administration will go after China tech industry with guns blazing and blacklist them from US   trade. The potential fall out from this battlefield would make the current tit for tat tariff war look like a game of axis and allies.

But the Pboc, not unexpectedly, jump started the process on Sunday by cutting the reserve requirement ratio for most commercial banks by one percentage point. The bank said would the net effect would inject Rmb750bn ($109bn) into the banking system to help spark growth to counter the adverse economic impact from US Tariffs and mainland’s deleveraging campaign but undoubtedly last weekend terrible PMI’s were a definite call to action. This monetary policy tweak is the fourth in 2018 and despite the weakening Yaun and the Feds embarking on a more aggressive rate hike tangent than expected, suggests the Pboc are putting their greatest energies behind stimulating the flagging economy as opposed to the US-China trade wars or Fed policy for that matter.

It’s not too much of a stretch to assume markets should expect more policy easing measures and increased infrastructure spending after China economy expanded at the slowest pace on record last month. The RRR cut will help but the  China economy will more monetary policy persuasion to snap its current funk.

European Markets

Late Friday the EC rejected Italy’s budget outline according to the letter sent to Fin Min Tria.

Oil Markets

There was some mild profit taking on Brent future heading in the weekend, but the benchmark closed out a very explosive week up 1.44% from a week ago. WTI held a bit steadier on the day suggesting there were some positions adjustment back into the cheaper  WTI benchmark ahead of this week’s set of US inventory numbers and closed the week out 1.5% higher than last week. Amid chatter that Saudi Arabia has replaced all of Irans lost oil.

Based on the dwindling spare capacity argument, the Oil rally is far from over. But the most significant issues is that no one seems to be able to pin down precisely how much OPEC spare capacity is. The state department, who is on the intervention warpath and quick to accuse OPEC of sitting on 1.4 million barrels daily(MB/d). But oil analysts quoted over the weekend “This is the lowest level of spare capacity in the global system relative to demand that I’ve ever seen. Spare capacity is moving to a precariously low point.”  Jeffries. Frankly, OPEC’s spare capacity issue has been the oil markets biggest mystery for some time with most of that debate falling around mega-producer Saudi Arabia. But assuming additional capacity comes in at 2.5 MB/d as supported by the recent  International Energy Agency data, the problem is that the capacity is quickly declining due to Asia’s insatiable demand.

Saudi Arabia claims it could produce 12. MB/d  if it opened all the spigots. However, that claim has never been given the once over as the highest all-time level for Saudi output, according to OPEC report was just over 10.7 MB/d in 2016, only before the Saudi-Russia led mega OPEC cartel orchestrated push to raise oil prices via supply cuts.

But as the spare capacity debate rages on, so will focus on critical near-term demand indicators after the Energy Information Administration reported a considerable build in U.S. commercial oil inventories last week.

Some headwinds to greet markets this morning.

Reports over the weekend suggest the Trump administration will provide Iran waivers. But these wavier are not unconditional and  are predicated on the countries weening off Iran crude 100 % compliant

Baker Hughes rig counts are down -2 as pipeline bottlenecks arrest supplies from the Permian Basin. But the bottlenecks don’t play out favourably for WTI given the pipeline constraints could lead to more significant inventory builds in Cushing, pressuring WTI lower and widening the Brent /WTI spread.

Finance ministers and central bankers head to Indonesia for the International Monetary Fund’s annual meeting, and officials have been dropping hints about trimming global growth forecast for the first time in two years.

Of course, the US economy keeps on ticking, but global synchronised growth has faded and should at some point provide a drag on oil demand. Higher oil prices will eventually lessen demand, but the multiplier effect from a weaker EM currency profile has a more significant impact. Most of the words rise in current as well as projected oil demand comes from EM countries, not from mature economies like the US and Europe where consumption is relatively stable.

Overcrowded trade and the ” porthole effect.”

The markets are still looking higher based on the dwindling global spare capacity narrative and by no means is this rally over. But as any futures trader will tell you, it can it can be hard for logic to prevail over emotion at times. The market is saturated with oil bulls, and in these grossly overbought conditions, it doesn’t take much to tip the apple cart. There’s nothing worse than that feeling realising that the excellent Oil position you have built, is similarly owned by everyone else in the markets. Knowing it would take little more than one bearish OPEC headline causing some prominent position to flinch, it could trigger an avalanche of traders running for the exits. It’s incredible how quickly prices can plummet when everyone’s running for the same door.

In  oil markets, traders refer to this as the ” porthole effect ” (I wish I knew who coined the phrase as I would attribute) Basically it’s unclear if the boat is sinking or not by looking out of the “porthole”, but if one person tried to escape from the “porthole” a free for all would ensue.

Gold Markets 

There remains a lot of risk in the markets, and there is a noticeably sick feeling in  US equity markets which should support prices.  But last weeks  Treasury sell-off will undoubtedly motive gold bears so unless equity market spiral entirely out of control gold could track lower.

Currency Markets

I have been harping to no end about how tricky it could be to trade the US dollar over the next few weeks given that it’s a complete data dependent trade. Well, it hasn’t been that crafty at all as US yields are leading the way so far. However, this week the US economic data docket looks relatively sparse outside of Thursday key US CPI print. But, given the level of political noise in the market,  in the absence of a busy slate of Tier one US economic data, there’s not much to keep the markets tethered to strong US fundamentals so that the US  dollar could remain prone to external factors particularly from China and Italy. However,  there are more FOMC tea leaves to read this week as a plethora of Fed members takes the stage to offer up their forecast for future policy. But after hearing  Powell last week, and with Bostic even sounding less dovish than usual on Friday, I don’t think this week’s Fedspeak will offer too much of a protest to discourage the US Treasury sell-off, but shouldn’t move the dial significantly.

The Chinese Yuan 

The Pboc’s  RRR could jump-start the greenback on Monday as this policy measure, although widely expected by traders,  should fuel additional easing talks and put more pressure on the RMB complex.

China’s foreign-currency holdings fell in September, as heightened trade tensions with the U.S. saw the USD safe haven appeal accelerated. However, the weakening Yaun could trigger waves of capital outflows leaving the Pboc with little choice to intervene to stem the tide

The Australian Dollar 

How the US/China tensions unfold will be a primary focus this week, given how quickly relationship has fallen off the rails during the past week or two markets are getting very worried about the negative knock-on impact to Aussie dollar which is the primary G-10 currency to express China risk. This week RRR is a bit of a saw off for the Aussie. On the one hand, the weaker Yuan by proxy should feed negatively in the Aussie, but the stimulatory effects could benefit hard commodity prices and lend support to the Aussie

The Malaysian Ringgit

Higher US Treasury yields are dominating sentiment based on the markets hawkish FOMC view and weighing in EM currencies.

The external environment isn’t at all amicable for EM Asia currencies, higher  US rates, tepid growth outside of the US markets, and the escalation of US-China tensions it’s near impossible to hold even the slightest of bullish conviction. Demand for MYR has been tepid at best  With the upcoming budget in focus; it puts a lot of pressure on the Malaysia government to deliver a fiscally prudent measure. While terms of trade do remain favourably due to oil prices, slow domestic growth could be a real negative for the MYR as it could trigger a dovish response from the BNM.

Outsized negative sentiment in IDR and INR is feed through the basket, but the biggest concern is a faster pace of interest rate hikes in the US.

AUD/USD breaches 0.71 despite positive trade data

AUD/USD through 0.71

Despite an expansion in Australia’s trade surplus and a better than expected print, the Aussie could not gain any benefit as the US dollar continues its upward trek. The trade surplus grew to A$1.6 billion in August, up from A$1.55 billion the previous month and higher than economists’ forecasts of a decline to A$1.4 billion. The improvement came from a rebound in exports which rose 1% after a 1% slump in July. Imports were flat.

Despite the improvement, AUD/USD fell through 0.71 for the first time in three weeks as the US dollar extended yesterday’s surge. The dollar, as measured against a basket of six major currencies, climbed to its highest level since August 17 as US 10-year yields held steady near seven-year highs. The FX pair is currently at 0.7095 and may find some support near the September 11 low of 0.7084.

 

AUD/USD Daily Chart

Source: Oanda fxTrade

 

EUR/USD at 6-1/2 week low

As the US dollar soars, so the Euro suffers with yesterday’s news that Italy was adjusting its longer-term deficit-to-GDP ratios lower, quickly forgotten. The FX pair traded down to 1.14625 yesterday, the lowest since August 20 and today has seen the pair extend its current losing streak to a seventh straight day. The pair is currently sitting at 1.1468 with Fibonacci support at 1.1403.

NOTE: The are EUR1.5 billion worth of EUR/USD puts expiring tomorrow at strike of 1.1450

 

EUR/USD Daily Chart

Source: Oanda fxTrade

 

World Bank maintains China 2018 GDP growth forecast

The World Bank announced that it was keeping its 2018 GDP growth forecast unchanged at 6.5%. The latest Bloomberg survey of economists shows forecasts of a median estimate of 6.6% growth in 2018, slowing to 6.3% in 2018.

Within the release, the World Bank upped its forecasts for Thailand and Vietnam while trimming those for Indonesia, Malaysia and the Philippines.

 

No stopping the US dollar runaway train at the moment

 

Factory orders to affirm strong economy

After the bazooka of the ISM non-manufacturing PMI and the ADP employment report yesterday, the US data calendar calms down a bit today with September Challenger job cuts and August factory orders on tap. Orders are seen rebounding strongly by 2.1% m/m from July’s 0.8% decline, further emphasizing the robust state of the economy. Note that back in August, the new orders index in the ISM manufacturing PMI jumped to 65.1 from 60.2 but fell to 61.8 in September. This could be a sign of what might happen to factory orders next month.

Other items on the data calendar include speeches from Fed’s Quarles (neutral, voter) and ECB’s Coeure while Canada’s Ivey PMI for September completes the deck.

 

You can view the full MarketPulse data calendar at https://www.marketpulse.com/economic-events/