China’s Spy’s, election meddling and NFP to keep traders busy
The market has that distinct odour of risk off. It’s incredible just how quickly sentiment has shifted in a mere 24 hours. There were nascent signs of asset rotation in Asia markets yesterday when the US fixed income yields ripped higher. And prospects of Feds draining the punch bowl at a quicker rate has investors reconsidering their bullish lean with US equities trading at record highs.
In response to tech led equity sell-off the US yields have backed off, so I surmise US equities are now driving the sentiment bus as volatility is getting bid up with the VIX trading above 15 overnight. But worrying headlines around China/US relations seem to have triggered caution in other markets. More so after Fed governor Kevin Warsh went into hyperbolic overdrive to suggest US-China relations are worse today than they were in the Nixon’s era. But I think market concerns have more to do with all the noise about China trying to sabotage the US midterm elections have US investors temporarily spooked. Knowing that if the White house does prove that China is meddling in the US midterm elections, we can assume a heavy-handed response on the trade front, and US tech companies that have extensive trade relations with China would be at high risk of falling prey to an escalating trade war.
Not to mention accusations of China employing microchips to infiltrate and spy on major US companies has sent more jitters through markets Bloomberg
Elsewhere, commodities are trading horribly as Oil markets have convincingly backed off this week high water marks. And looking at some of the carnage a broader sector of assets, Im reminded that “nothing in this universe, including the universe, lasts forever.”
I think its a combination of factors leading to this turnaround, notwithstanding the latest rip in the US, fixed income yields sending negative cross-currents. While this week’s Fed speak does paint an exceedingly rosy picture of the US economy, the prospect of higher inflation and the Fed responding with even quicker and steeper rate hikes, historically faster than expected Fed rate hikes have posed a considerable negative for equity markets.
I don’t necessarily view higher US interest rates, especially at these historically low levels as a good enough cause and effect to torpedo longer-term bullish equity sentiment. But if it is proven to be a false flag, and China is indeed proved to be meddling in US election interests, it will trigger a swift and uncompromising reprisal from the hawks in the US administration and would sound the alarm bells across global markets.
Day in day out these markets are full of intrigues, and frankly, we have President Trump to thank or blame, depending on what side of the Vol tracks you’re riding. But indeed, it does look like a bumpy ride for Q4.
Oil markets
From any fundamental perspective, it should not have been a strong week for oil prices after a massive DOE US inventory builds, Oklahoma, crude stocks rose about 1.7 million barrels from Sept. 28 to Tuesday while factoring the Reuters article that suggested Saudi -Russia le OPEC mega cartel will add more barrels to offset Iranian shortcomings.
Traders were so overly focused on Iran sanctions negatively affecting physical supply along with ambiguity around Saudi Arabia spare production capacity; that clearly, traders were blind to the facts this week and are now going through a bit of a reality check ahead of the weekend.
But the decline in US equities and waning risk sentiment also factored into the sell-off
Oil markets remain in the bull zone. But with a lot of the short-term speculator froth running for the exits, there a tendency for longer-term players to revert to low ball bids knowing the markets will come to them. But the Brent $ 84.50-75 support channel remains very well bid, and it would take a break of $84 in my view to suggest that last nights price action was anything other than profit taking after this week’s huge move higher.
Gold Markets
In the absence of any convincing, clear-cut catalyst the markets have been in consolidation mode. Cleary the markets are attaching a whole lot of significance to tonight’s NFP print as the markets have remained rangebound as trader know the outcome of tonight’s data can significantly shape the market’s rate hike expectations and the near-term outlook for the USD. So indeed, there a lot riding on tonight employment data. Failing any USD surprises, expect current tight ranges to persist ahead of tonight’s data print
Currency Markets
EM FX traded weakly. However, US yields are stabilising lower, and EUR is surprisingly resilient.
G-10
But we are in for a very unsettled 20 + hours as currency traders table if full jockeying for position ahead of the payrolls data for NFP, evaluating and trading the NFP correctly while factoring in the expected waves of positions squaring ahead of the US long weekend.
Japanese Yen
Dollar-Yen traded lower as US bond yields fell while markets continued to debate JGB’s and the inevitable BOJ policy shift as a Reuters article was making the rounds in London. Reuters
But everyone was quietly cutting long USDJPY in Tokyo markets earlier in the day when intense focus fell on JGB’s that we’re moving to the .15 area after the BoJ last intervened at .147
Markets are long USDJPY, so position squaring ahead of tonight NFP also contributed. Key levels remain 113.50 and 114.50
The Canadian Dollar
Mired in the stronger USD but with double trouble on the payroll front as both Canada and US are release on Friday, CAD traders have pared back bullish bets considerably. With the BoC rate hike firmly entrenched in markets views, CAD traders are looking for a spark to upend those nasty Canadian dollar perma bears on Bay street.
EM Asia currencies
The external environment isn’t at all amicable for IDR -INR -PHP, the weakest links in EM Asia currency chain Higher US rates, tepid growth outside of the US markets, soaring Oil prices compounded by concerns over the impact of US-China trade tensions it’s near impossible to hold even the slightest of bullish conviction.
Indian Rupee
But again, its back to the unconventional Well for India’s government to stem the INR deep depreciation.
While offering up a barter and deferred promissory notes are being considered as an option to reduce India’s reliance on the USD for trade and oil purchase.
ON first China could charge a decent premium on the INR-CNY currency trade agreement to make this fly.
But buying oil from Iran or Venezuela could trigger negative reprisal from the US especially for those companies that were holding off in the hope of winning sanction waivers for the USD. India’s refineries have been busy bees loading up on Iranian oil ahead of Nov 4 sanctions when traditional USD banking settlement channels will be blocked. Reuters
The Malaysian Ringgit
Demand for MYR has been tepid at best but yesterday warning shot across the bow from the world bank has dented sentiment even more after downgrading growth forecast. 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 waning growth could be a real negative for the MYR as it could trigger a dovish response from the BNM.
