US markets
In the span of a mere 24 hours two of my most pressing question may have been answered, correctly, can the anomalously robust US equity market hang on in the face of mounting global risks? And are we entering a period of drawn-out USD selling?
Mind you, with many distractions on the radar, there are two not so subtle, under-the-radar distractions sending global trading floors abuzz this morning. Specifically, the astonishing outperformance in both US equities and emerging markets.
US equities markets soared to their biggest gain in six months following strong earnings and uplifting reports on the economy.
The Labor Department reported that U.S. employers posted the most jobs in two decades in August as expectations around hiring continued to outpace while US industrial pace and the Federal Reserve said output by U.S. factories, mines and utilities climbed in September despite the effects of Hurricane Florence.
Equity investors took their cue from the industrial production report which indicated inflation isn’t picking up, triggering another Goldilocks economy rally. But whatever signal convinces investors the Fed will not move interest rates up quicker than expected will be latched on to the big time especially in the face of robust US data.
But let’s take this move in context, sure +2 % gain on the S&P is astonishing in anyone’s book, but significant indexes are still broadly lower for the month following last week 2-day meltdown as investors fretted over a fast pace of Fed policy normalisation.
However, it is the best of both worlds for US equity markets, with the economy in full swing but nary a sign of inflation as Goldilocks returns for yet another day. Which is providing a much need diversion from trade tensions and concerns about global growth downtrend. Also, the dollar fell overnight as traders are contemplating the Greenback fate ahead of the US midterm elections.
Nothing like a robust US market and a USD lacking any momentum to trigger the Asian market into action!
Oil Markets
The American Petroleum Institute figures for the week ended October 12 showed an unexpected 2.1 million barrels per day decline in US crude oil inventories even as stocks at the Cushing, Oklahoma delivery point for NYMEX WTI futures increased by another 1.5 million barrels per day. But the headline did catch momentum speculators wrong-footed who were expecting another build.
Prices were also bolstered by rising US stock market providing a welcome distraction from trade tensions and concerns about global growth as investors are back focusing on tighter global supply due to Iran sanctions. It’s widely expected that Iranian exports, which are already dropping, will fall quite sharply from November onwards, and even if Saudis and other OPEC bodies have compensated the anticipated shortfall to some degree there will undoubtedly be a near-term imbalance which will pressure prompt prices
On a side note regarding a slower global growth narrative or an adverse knock demand side effect from weaker the US emerging market currencies, there’s no definitive, quantifiable data to support this view, as global energy demand remains robust by any demand-side measure.
None the less Brent prices risk is skewed higher as Venezuela, other the Middle East concerns, North and West Africa remain hotspots for supply disruptions in coming months. And with traders all too aware that we are little more than one supply disruption away from a move above $ 85 Brent, prices remain very well supported on pullbacks after reaching four-year highs last week.
Gold Markets
Given the political firestorm igniting around the US Midterms, Italy, and US-Saudi tensions, gold’s upside is looking favourable as a tail hedge against these escalations. The mid-term elections in themselves will provide more than enough political fodder to keep the flames going, not to mention the possible equity market drawdowns from a shift of power in the “house” if a Blue wave takes control.
Gold did back off from intersession highs as US equity markets rallied convincingly, which was triggered by a more robust US Industrial production data. But with inflation absent from the report, it doesn’t shift the Fed dial. This view is significant for Gold prices as it suggests without an uptick in US Inflation for the USD to tether itself to in the run you to the US election, we could see the dollar sell-off as US political headline risk is expected to escalate and should lead to Gold outperformance.
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.
However, perhaps a hawkish warm-up ahead of tonight’s FOMC minutes San Francisco’s new President Daly said she does think it’s a balance between hiking too fast and getting behind the curve but her remarks on the economy are strong. On inflation, the Fed is “effectively at the 2.0% target.” For potential tailwinds, however, she does name three: financial conditions, global growth, and fiscal stimulus.
Currency markets
The Yuan
The CNH will be closely watched in Asia today after some shifting sentiments were observed in the NY market. But the latest China inflation prints were failing to highlight just how problematic higher prices are for Chinese consumers while only suggesting that producers are unable to pass on higher cost from the weaker Yuan and or tariffs impact.
The US Dollar
Traders will be watch USD housing starts intently, remembering that the housing industry has been the most disappointing segment of US data in 2018.
While the TIC data has taken on a secondary level of importance in recent years, one question mark China’s holding of US Treasuries fell for a third consecutive month in August. I don’t believe there is anything sinister in this trend other than the fact the Pboc could be building their USD war chest to intervene if the Yuan moves too quickly above 7? Or its little more than prudent reserve management policy with the markets expecting the USD to struggle in 2019
We are starting to see signs of a USD capitulation ahead of the US midterms as dollar bulls are becoming increasingly nose-ringed to the US midterms elections.
The Euro
Currency markets are cautiously busy with most of the focus on JPY and EUR in New York, but well-worn ranges held
Little has changed from last week view that was dominated by risk reduction of USD long positions. In the meantime, the EURUSD is struggling to break through a wall of offers between 1.1600 -25. None the less, when EURUSD eventually breaks it’s 1.1450 1.1750 range, it will be through the top of the range, but given the temperament and choppy nature of trading the EURUSD these days, it will require a great deal of patience.
The Japanese Yen
The USDJPY moved convincingly lower on last week US equity led meltdown. Traders are monitoring the scope of the latest US equity market recovery. But on another equity market wobble risks remain more significant to the downside for USDJPY as the midterm US elections near.
The British Pound
Sterling has been weighed down by virtually every conceivable negative Brexit headline, but there is no denying the latest employment report that is signalling ages are now growing faster than prices!! The Pound continues to grind higher even although a Bank of England rate hike is very much dependant on Brexit going through
The Malaysian Ringgit
With China trade headlines mostly absent, regional markets have been much calmer this week. But oil has been sending mixed signals but remains well bid on dips, which should be supportive of the Ringgit, But the focus will be on the CNH today( see above)
