Tap the brakes or foot on the gas?
U.S. stocks closed mostly higher Wednesday as investors continue looking past the US-China trade dispute while focusing on solid US economic fundamentals. Indeed, US investor and equity markets, in general, are showing little sensitivity to US tariff implementations, at least at current levels anyway. So, with investors in evaluation mode and with both the US and China s likely to resume negotiations, expectations are still there for a resolution before the President Trumps deems it necessary to double down on tariffs.
In addition, US stock markets are impervious to rising US yield while choosing to focus on increasing banks stocks, benefiting from those juicy US yields and the energy sectors are on the ups due to spirited oil markets. Indeed the trend is your friend.
Oil markets
Oil prices are soaring after the more conclusive EIA reported a 5th consecutive inventory drop but more significantly to a three year low. And US crude exports rose 539 K per day to an eye-catching 2.37 million barrels per day. The bulls are back in charge even more so after traders were conveying a high degree of resistance to the unexpected build on the API survey. Suggesting that in the near term at least, Iran sanctions matter more than the yet to be determined negative Oil demand impacts from US tariffs.
But ultimately, OIL prices remain strongly supported by Tuesday’s Bloomberg reports that suggest Saudi Arabia is now comfortable with Brent at $80.
OPEC and other producers including Russia will meet Sept. 23 in Algeria to discuss possibly compensating the loss of Iranian output, estimated at 1.4 million barrels a day. The current market betting line suggests price levels rather than global supply levels will be the key determinant on turning on the oil taps.
And with comments from Saudi Arabia suggesting $80 is not the level or that OPEC, more generally, is not considering raising output at next weeks Sept 23 meeting. As such, traders are apt to push the envelope and are targeting $85 Brent level especially on a bullish confirmation from the Algeria meeting.
Venezuela will but their 5 billion line of credit from China to good use by likely ramping up production which will be earmarked for China. We could view this as a tit for tat indirect escalation of a trade war in the broader context.
The US LNG sector is indeed feeling the pressure as China has dialled back it’s direct LNG purchase for the US in favour of Australia and Russian supplies.
Gold Markets
Gold Markets are edging higher again but the performance has been very meek.
The weaker dollar has lent some support, but the yellow metal has not been able to break free of the downward trend which continues to run near $1210 level. Until there’s a convincing break higher or lower on G-10 currencies, the $1190-1210 range play should remain intact.
EM Currencies
Tap the brakes or foot on the gas, synchronicity or idiosyncrasy; these are the question facing EM traders this morning. Indeed, EM markets have been catching the tailwind from CBT rate hike, CBR surprise rate hike, BI potential mandatory FX conversion for exporters and the RBI currency countermeasures. All of which contributed to taming the beast (USD) to various degrees, but this semi consorted intervention when taken in context with the de-escalation on trade war bluster has investors and traders alike dipping their toes back into the EM water.
Indeed there was a massive fire sale on the weaker links in the EM chain, but from my seat at least it would be sheer folly to discount US-China trade war, 10y US yield which climbing above 3.05 %and the two year yields returning to 2008 highs suggesting the bond market is indeed pricing in a more hawkish Fed in 2019 than currently priced in . These are indeed big negatives.
Buy traders where feasting on a smorgasbord of EM assets there has been some outsized interest in the IDR after a convincing bond rally after news of a potential mandatory FX conversion for exporters hit the wires.
But in no small degree, comments from the current Premier of the State Council of the People’s Republic of China, Li Keqiang, stated that China would not devalue their currency to make exports more competitive as ‘one-way devaluation will do more harm than good to China’s economy.’ Is having a lot of influence on the current proceedings, and therefore I’m erring on the side of caution as history tells us the Pboc policy is very fluid and can shift on a dime
Local EM
MYR: The stronger Yuan profile and improving global risk and EM sentiment are helping regional currencies in general. But oil remains the Ringgits ace in the hole and with Brent looking to test convincingly north of $ 80.0 there will be some appeal for the Ringgit. However, given the lower than expected Q2 GDP print and tepid inflation the MYR will get little help from BNM for the rest of 2018
IDR: Odds suggest that BI will match next weeks Fed hike but despite the nascent bond rally, too many negative factors despite a solid performance on yesterday tape, to suggesting going full bore in this trade
INR: Likewise, the RBI will likely match the Fed move, but oil prices on the boil again suggest traders will probably tap the brakes below .72. even despite RBI ‘s ‘whatever it takes approach to defend the rupee.’
G-10
The dollar is looking very tired, and while the natural trade is to be long dollar ahead of a possible hawkish shift from the Feds next week, price action says otherwise keeping the dollar bulls at bay
Aussie continues to benefit from the unwinding of the consensus short AUDJPY trade. Commodities are on the swing higher suggesting a bit more room to run on the AUDUSD momentum which could see us test .7300
