Not quite Goldilocks
Not to state the apparent but markets are finding themselves in a total state of discombobulation as we mercifully head towards the weekend. There have been multiple train wrecks over the past 24 hours, and the continuous wall of worry around US yields and US-China tension still weighs on equity sentiment.
Goldilocks? Yes and No
Not quite the Goldilocks narrative that we are so accustomed to after a weaker than expected inflation print (CPI) as those three bears are not so good-natured or harmless and are forever prowling looking for the opportunity to drive risk lower. The more moderate inflation prints only provided a modicum of repose and far from the antacid “plop- plop fizz-fizz ” oh what a relief it is, the market so desperately needed. Wall Street recorded its second day of steep declines. But there is one positive, however, as the overnight session came to a gruelling finale, New York traders could finally catch their breath. !!
However, some of my colleagues are suggesting EM FX rallied in response to the CPI data – implying that at least for some, the read on the data did that confirm markets are in the so-called Goldilocks zone where the US economy is – not too hot or cold, and just right. But I think the improving EM sentiment has more to do with the RMB complex.
Chinese Yuan
USDCNH sprung a leak through 6.88 overnight triggered by a Politico article which stated the internal report to Treasury Secretary Steven Mnuchin did not recommend that Beijing is labelled a currency manipulator and continued to place China on a monitoring list.
But adding to the momentum f China’s Ministry of Commerce issuing some comments regarding the arrest a technology spy, reports that China-US trade talks will resume and chatter that Xi and Trump will indeed be meeting at the G-20 sidelines next month. Trump is willing to meet with Chinese President Xi, but Beijing needs to show openness to compromise.
The moves lower on USDCNH have eased some anxiety, especially for EM Asia FX that that had been building in worst case scenarios that China could let the Yuan fall. But even more significantly for global markets is that the US Treasury Department’s staff has advised Secretary Steven Mnuchin that China isn’t manipulating the yuan as the Trump administration prepares to issue a closely watched report on foreign currencies, according to two people familiar with the matter. So, if Trump and Munichin accept these finding at face value, which the market agrees with, it could avert an EM Asia currency meltdown and would forestall an escalation of the U.S.-China trade war.
Positioning was heavy long USDCNH in Asia yesterday, and a cascade of stops losses have triggered on the move lower. At least this should offer a glint of relief for Asian capital markets.
USD Asia was under intense focus overnight Overall FX interbank volumes were approximately 45% higher across spot G10 & EM, as the upshot of US CPI, CNH headlines and continued cross-asset volatility and vital focal points USDJPY, EURJPY USDCNH and HKD experienced a two-fold increase in trading volumes. But none the less US-China relations remain to be the focal point for markets. There is some nervousness about the US Treasury Currency Report due to be released the week, but sentiment has thankfully improved for regional investors.
A Bullish Glint?
The overnight chatter does suggest that at a minimum there will be a softer tone on the currency manipulator theme, although the unpredictable nature of commander and chief Donald Trump does raise the level of uncertainty, and there could be more risk-reduction into the weekend as investors position more defensively. But this does offer a significant window of opportunity for the not so meek of heart.
Oil Markets
In the near term, crude oil traders will likely focus on global equity markets looking for any signs stability to conceivably mount a recovery for the current headwinds.
But oil markets are indeed going through an inflexion point of their own. OPEC’s Monthly Oil Market Report has followed the DOE Short-Term Energy Outlook reporting supplementary non-OPEC production growth, with a 200,000 bpd increase from a month ago which lessens demand for OPEC barrels.
The oil markets are sagging as more bullish bets performed a ” cut and run ” after Energy Information Administration showed Crude inventories rose by 6 million barrels in the week to Oct. 5, as analysts again wholly missed the dartboard expecting a build 2.6 million barrels. The EIA data came in lower than the eye-watering API build but its still a larger-than-expected increase for last week as refinery runs continue to fall due to seasonal maintenance work as another increase in Cushing WTI NYMEX delivery hub just added to the negativity.
With supply worries now gripping markets after this bearish EIA report, supply-side anguish has slinked into the equation as oil traders remain on the defence. Indeed, it’s hard to sugar coat this week’s inventory data, but for perpetual bulls like my self, if risk stabilises around improving US-China tension, there are some very cheap entry points on offer. And given positions are much cleaner after the latest ” Porthole” effect, there should be good support near and around $80 prompt Brent.
Gold Markets
This global market tumult was the opportunity that gold Bulls had been waiting for since last Wednesday when nascent sings of and impending equity market meltdown started to ferment as both US -Yields and US-China trade tensions were creating some significant headwinds. As the playbook suggested Gold markets finally showed some of life, but it took an absolute pummeling on equity markets to trigger demand as market lolloped towards critical l $1200 level. But on the break, buying accelerated as near-term stop-loss triggers came into play once the 50-day moving average gave way. But it was the softer than expected CPI print and with risk aversion remaining front and centre, it provided the catalyst to test the significant resistance level at $1225.
Currency Markets
Granted there’s always that initial shock factor when the Presidents preaches Tumpanomics especially when his views challenge the world’s most powerful central bank. But these types of outlandish remarks tend to have few lasting effects from my seat.
The Euro
The EURUSD has been driven by USD sentiment more than EUR itself. Both of Italy’s houses of parliament have voted in favour of the government’s fiscal outline, so it is only a matter of time before it goes to the EU. Political uncertainty and Italian politics that usually runs at a heightened emotional state, there enough uncertainty around this Budget that should keep the Euro lower view attractive.
The Malaysia Ringgit
Weaker oil prices will be offset by lower USDCNH. However, traders remain incredibly defensive on the MYR due to the escalating budget noise. While the could be some topside USD reprieve, the next big hurdle for regional currencies is the US Treasury report regarding currency manipulation on Monday as everyone is focusing on the US treasury view about China.
