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.
