Global Equity Markets Roar

Third-quarter results for UnitedHealth group were better than expected and led it to raise profit guidance for the year, with similarly upbeat reports also from Johnson and Johnson and JPMorgan. European equities were mostly up, too. Gold struggle in the face of surging US bond yields and the general risk-on fervour 

Brexit

The Pound galloped higher overnight, leaving the currency around 4% stronger over the past week. RTE News’ Tom Connelly, who broke the original Brexit ‘deal’ story, writes that the EU and UK sides are the closest they have been and that there is some optimism now. He has Irish sources typically, so this is another positive sign.

European stocks rallied to levels not seen in more than a year as speculation that a Brexit deal is imminent prompted traders to scoop up shares across the board.
Of course, any ‘breakthrough’ between the EU and the UK must still face the British house parliament.

But traders remain favourably positioned for the ‘white smoke’ moment hoping for domestic ratification on Brexit.
Framing out the “feel good” risk-on vibe, the US-China trade discussions seem to be making some progress, and the prospect of a genuine truce has risen.
Asia open

While Asian cash market looks set to gain however entering the morning session, traders have hit the pause button possibly awaiting the outline of a Brexit agreement to judge the likelihood of parliamentary approval, which suggest there still much wood to be chopped before pen gets put to paper.

As well, investors are looking for more clarity around the various phases of the US-China trade talks. Individually, Chinas firm commitment to buy $50 billion in US farm goods, details around December tariff detente, possible first-level tariff rollbacks and any signs progress on lifting the US export ban on Huawei, yup lots of wood to chop there also.

Oil market

Crude fell for a second day amid a weakening global growth outlook and as US oil producers defensively hedge against copious crude supplies in the world’s largest economy.

Oil markets continued to struggle overnight under the weight of a dreary macro scrim as back to back miserable China data prints (bad trade data and factory gate inflation) were compounded by a Germany’s sickly ZEW survey which pressured prices.

However, a lower base is being tentatively held in check after OPEC Secretary-General Mohammad Barkindo reiterated his “whatever it takes” to sustain oil market stability mantra.

While corporate earnings reports and phase one of the US-China trade talks is buttressing general risk sentiment, without an implicit rollback of existing tariffs, a tariff detente will have minimal effects on shifting the global growth dial to a more pleasant setting and therefore limited impact on oil prices. In other words, a detente means things may not necessarily get worse, but it doesn’t suggest that global economic conditions will improve any time soon.

But the fact that the losses are very sticky at these downcast levels it could be another worrying sign for oil bulls.

Gold market

The robust US corporate earnings reports coupled with positive developments on the Brexit front has triggered a market rotation out of bonds into equities resulting in US 10-year bond yields significantly rising which is weighing on the opportunity cost of holding gold.

Roaring US equity markets and an upsurge in US bond yields are possibly two of the worst flatmates for gold; as a result, gold toppled nearly $20 top to bottom overnight.

Also, The NY Fed manufacturing survey lifted a better-than-expected 2pts in October, giving the hawks on the FOMC “something to talk about” and perhaps hawkishly influencing their October policy decision process.

Currency markets

Japanese Yen

The “Risk on” environment has propelled the USDJPY higher within reach of the psychological 109 level as the S&P 500 had a peak above the equally cerebral 3000 markers.

Australian Dollar

The market is still debating the RBA’s monetary policy gymnastics. But given the RBA Board is expressing some doubts about the efficacy of dropping rates further operating in what for the RBA is uncharted territory, it could mean slowing the pace of rate cuts but doesn’t necessarily alter their dovish bias. Despite a frothy global “risk-on” environment, the Aussie dollar is trading 20 pips off yesterday’s session tops.

The Yuan

The Yuan may remain stable within the current 7.05-7.10 level while the phase one trade deal gets chiselled out.

Back to back weaker economic data out of China (Trade and factory inflation gate) provided a stark reminder if not a reality check that a weaker Yuan from a pure fundamental landscape may still be in the cards. As such the USDCNH has traded with a better bid overnight.

But given there remains a strong possibility of a Phase 1 deal getting inked, at minimum USDRMB topside should remain capped and we could see the CNH outperform in the weeks ahead assuming phase 2 and 3 of the propose US-China trade deal comes to fruition.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

A Fragile State Of Trade War Neutrality

Beyond chiselling out those details, doubts continue to swirl whether China and the U.S. can reach a full trade agreement to end the trade spat. Investors were reluctant to jump on the rally bus while enthusiasm about the potential for a significant U.S.-China trade breakthrough waned.

But this possibly goes well beyond a tariff detente as trade friction has also spread to technology and financial sectors in the past few months. Suggesting, the U.S. administrations attitude towards China does not appear to have improved significantly.

Given the recent economic war escalations, it might suggest we remain in a fragile state of “phase one” trade war neutrality unsure if it may last or even what sweeteners and apparatus have been constructed to ensure both parties compliance.

While bullish momentum has faded somewhat, risk steadied overnight when Treasury Secretary Mnuchin said U.S. and China reached “fundamental agreement” on several trade issues last week and a tweet from the Global Times’ editor-in-chief sketched a more cheerful outlook.

Oil markets

Oil dropped the most in two weeks amid concern that the recent U.S.-China trade talks won’t lead to a deal reinforcing the fact that the outcome of the agreement is probably the most significant near-term factor for oil sentiment.

Indeed, a definite conclusion of trade talks, even a phase one deal, could do a great deal to alleviate those gnawing emotional concerns about global demand as traders continue to wear demand sensitivities on their sleeve.
But oil prices stabilised after calming trade talk comments from Treasury Secretary Mnuchin.

While oil traders are all too knowing that chasing headline risk is fraught with peril. But demand erosion from the trade war is such an overwhelming pervasive bearish skew; it might be impossible for traders to ignore the ebb and flows from headline risk.

Currency market

The Japanese Yen

Risk markets fell under pressure after headlines reported China wants more talks before it signs up to the tentative trade deal announced by the U.S. on Friday.

USDJPY slipped to 108.05 from 108.20 but remained bid on the dip after risk market steadied

The British Pound

The Pound looked a little perky slicing through 1.2600 in the late New York afternoon possibly due to the absence of any negative headline suggesting that the talks are not breaking down.

The Chinese Yuan

The Yuan may remain stable while the phase one trade deal gets chiselled out within the current 7.05-7.10 level While the Yuan rallied convincingly in Asia yesterday down to 7.05 USDCNH level , the weaker China trade data provided a stark reminder if not a reality check that a weaker Yuan from a pure fundamental landscape may still be in the cards.

But given the extremely high probability of a Phase 1 deal getting inked, a subsequent Yuan currency accord and China’s ongoing commitment to stabilising the Yuan, 6.90 USDCNH now appears to be a reasonable target for USDCNH at the end of 2019 assuming phase 2 and 3 remain on target.

Of course, this view differs wildly by 30 “big figures” from some banks analyst who are pegging year-end USDCNH at 7.20 expecting no significant developments from the phased-in trade talks.

ADXY

Yesterdays USDAsia selling flows were reversed overnight after a run of not so friendly trade talk headlines. But with markets zeroing in on ADXY 103.70 resistance which has thwarted several rallies in 2019, the reversal may also have been compounded by some profit-taking.

While positive momentum is building and the rally in local currencies may extend further particularly on the basket of THB/SGD/IDR/MYR/KRW, traders may be waiting for this fundamental level (103.7 ADXY) to breach on a closing basis to confirm the next bullish leg higher.


Bloomberg

Gold markets

Gold is trading firmer this morning but off overnight highs. Headline risk will continue to dominate, but at the end of the day, what matters most for gold is lower interest rates. And through all this tangled web of headline and phased in confusion, there is one essential narrative that seems to be getting lost.

There is a difference between detente and a deal. A detente means things don’t get worse, but it doesn’t implicitly suggest that global economic conditions get better at once. So, with the latest run of weaker financial data implying that central banks may keep interest rates lower for longer, gold could remain supported short term.

And despite hopes building on a trade truce and a Brexit breakthrough, defensive positioning remains high. And predictably so as if trade talks are struggling at this soft-pedalled level, discussions may not get more comfortable when the complicated intellectual property and technology transfer issues get tabled.

But over the near term, gold could face significant fundamental headwinds in the form of higher US yields and improved equity market risk sentiment especially as we move through to phase 2 and 3 of the US-China trade deal. And if a comprehensive trade deal is inked in November, then the extremely extended long gold positions might be prone to a significant correction lower.

FX Traders who are caught offside may look for opportunities to pare back currency risk aversion trades, as such gold investors need to respect the underlying movement on the Yuan and Yen. USDCNH 7.0 and USDJPY 109.00 are a hugely critical “risk-on” sentiment level

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Return of Trade War Neutrality

Global equities rallied again, and treasuries sold-off Friday, aided mainly by an agreement on US-China trade the US president has described as a “very substantial phase-one deal”. The S&P500 closed +1.1%, with European equities stronger as well. US 10-year treasury yields lifted 6bps to 1.73%. Oil was up 2.2% amid reports of a possible missile attack on an Iranian oil tanker off the Saudi coast. Gold fell 1.2 %.

  • The ‘deal’ represents the most material breakthrough since the trade war started, but it neither rolls back existing tariffs nor reverses the damaging spillover of tensions into technology areas.
  • The RMB may strengthen further, especially if the fixings are lowered this week.

However, US equity market sold off into the close; traders view the deal in a tentative light as a tariff detent falls well short of bridging the critical trust gap which is an implicit removal of a significant chunk of existing tariff while the lack of specificity and even the fact this baby stepped agreement could take weeks to iron out, quickly cooled trader optimism.

But their remains this gnawing fear that phase one could end up being little more than the same old lather rinse and repeat trade detente followed by trade escalation, so indeed the next 48-72 trading hours are critical given memories of how quickly the post-G-20 trade calm evaporated.

This morning President Trump tweeted My deal with China is that they will IMMEDIATELY start buying very large quantities of our Agricultural Product, not wait until the agreement is signed over the next 3 or 4 weeks. THEY HAVE ALREADY STARTED! Likewise, financial services and other deal aspects start preparing. I agreed not to increase Tariffs from 25% to 30% on October 15th. They will remain at 25%. The relationship with China is very good. We will finish out the large Phase One part of the deal, then head directly into Phase Two. The Phase One Deal can be finalised & signed soon! –

However, the market is treading gingery at the open awaiting more specificity on the trade talks, as local currency traders sit patiently for the release of today’s USDCNY reference rate ( Yuan fixings) and whether it will be much lower than the 7.07 level it has been stabilised at over the past month or so

Relief and disappointment

It could be a day of mixed emotions as investors express a combination of relief and disappointment Relief because the next round of tariffs for October and December will be delayed indefinitely as a good-will gesture in exchange for further talks with China who have committed to buy more US farm goods. But disappointment by the baby stepped nature of the negotiations, as both sides kicked the can on the essential issues that have not been resolved. As such. the phased-in deal process, albeit more harmonious will be staged in through late 2019 early 2020, however, the most immediate tariff escalation concerns have been removed

Oil markets

Oil prices spiked higher Friday amid renewed concern about global oil supply after the explosion of an Iranian oil tanker in the Red Sea, and optimism over an amicable end to the trade talks.

Progress around the next phases of the trade negotiations is probably the most significant near-term factor for oil sentiment as harmonious negotiation leading to a definite conclusion could go a long way to alleviating global demand concerns.

But for immediate concerns trader will likely continue to monitor post-trade talk headlines to gauge the balance of this newfound level of trade war neutrality before taking on more risk.

Gold markets

Gold has been outperforming against JPY and CHF despite the market going “risk-on” mode amid bullish equity market outcome from the US-China trade negotiations suggesting the downcast economic data out of Europe and US may imply a lower interest rate scenario extends longer. And especially in Europe were more banks look to pass on negative interest rates to deposit customers which could be a boon for gold demand.

Still, with much of the global interest rates scenario factored into the gold forward curve, gold investors are in search of that next major catalyst that could take gold over the $ 1550 top.

As such, focus this week will be on the plethora of Fed speak and critical US manufacturing and consumption data, which could provide more clues about this months Fed policy meetings.

Currency markets

G-10

US-China trade talks led to a risk-on bias & selling of Yen and CHF while large buyers of Asia EM FX, particularly CNH and KRW emerged. And EUR cross buying pushed EURUSD through 1.1000, triggering a short-covering rally.

After constructive US-China and Ireland-UK talks, safe-haven currencies have been under pressure. Risk-sensitive euro crosses have performed the best, supported by EURUSD breaking back above the psychological 1.10 handle.

Asia FX

While the outcome from the latest US-China talks may still be mildly positive for the RMB in the near-term, even with hedge funds and asset managers who were thought to have pilled into the so-called “Yuan accord” trade. Also, there could also be a short-term positive reaction by other Asian currencies that are sensitive to RMB movements the KRW, TWD, MYR and the SGD. However much of the near-term market response depends on the Pboc reference rate this week, precisely how far the fixings are pegged below USDCNY 7.07

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Last call at the Last Chance Saloon

With the exasperatingly conflicting tempest of trade headlines abating, investors are starting to believe there is light at the end of the trade war tunnel as hope springs eternal injecting the elixir of life into global capital markets after President Trump says day one of the trade talks went very well

Stocks gained, and Treasury yields jumped as a brutal day of reckoning could unfold for bond investors as U.S. 10-year yields soar possibly indicating the “pain trade” could be on the verge of short-circuiting a heavily subscribed global bond market. Treasuries fell Thursday amid a global government bond rout triggered by a combination of US-China trade calm and Brexit optimism which sent the Pound soaring.

The pain trade is a point of reaction and how the market reprices both the Fed and the ten-year U.S. Treasury yields on a positive trade talk outcome.

Oil markets

Crude rose after OPEC Secretary-General Mohammad Barkindo said members and allies including Russia would do “whatever it takes” to prevent another oil slump as the global economy weakens.

Jawboning aside, at a minimum it reaffirms OPEC + position and supply discipline to do what is necessary to support oil prices that have been severely undermined by slowing global growth.

Also, OPEC reported that oil markets were in the most considerable supply deficit since 2007 as OPEC exacted deeper production cuts.

But its possible optimism around trade talks is what continues to steer the tanker. The US is the largest global consumer of oil while China, the biggest driver of year-on-year oil demand growth. So, it would seem logical that the most significant sentiment driver hinges on the outcome of the trade talks which if end on a positive note could go along way to begin to repair the economic damage done as a result of the protracted US-China trade war and these economic powerhouses would need more oil .

Gold markets

Gold has lost a lot of momentum as we await the outcome of the U.S.-China trade talks

Trade talk optimism, rising U.S. Treasury yields and a divided Fed which suggests October rate cut might not be such a done deal, continues to lean on record long ETF gold-backed investor positions.

A worst-case scenario for gold?

And while the market current base-case scenario suggest a pre-emptive 2019 Fed interest rate cut is in the cards, the issue for Gold markets is if we are entering the first phase of a tariff unwind, the Fed could still cut in October but reiterate this is still a mid-cycle adjustment implying a hawkish cut which could seriously undermine gold market.

Currency markets

ASEAN FX

With too many juicy currency correlations to ignore as talks of a US-China Yuan based currency pact continues to percolate and the U.S. dollar, kindly for ASEAN risk markets, cedes ground as local fear factor hedges unwind, ASIA FX trades well overnight.

Ringgit traders are sitting tight awaiting the budget announcement where a possible budgetary conflict of prudence and growth will intersect with the Ringgit and Malaysia capital markets

Local FX trader will be focused on the THB as the Bank of Thailand, and government officials relentlessly jawbone the THB weaker to no avail as the current-account surplus, and $220 billion of foreign reserves makes the Baht a key destination for haven flows.

Its a concern for everyone

As an FYI it’s even holding me back from buying another property in Bangkok as my projected break-even on CADTBH is at 25.0 vs the current 22.88. The Baht strength is absolutely mind-boggling.

G-10

Boris Johnson met his Irish counterpart Leo Varadkar for crucial talks over lunch as the U.K. and European Union seek a way through the impasse with time running out to reach a deal.

The two leaders said they could “see a pathway to a possible deal,” in a joint statement after the talks, which saw the Pound soar and Euro bulls desperately trying to hitch a ride as European equities gained on the positive Brexit news.

But with Euro Forex traders watching the November 13 deadline for President Trump to decide on tariffs on EU-produced cars, the EURUSD rally ran out of steam.

US-China trade talks have been the market’s focus, where possibly a better bid in risk assets would put more downward pressure on the EURUSD.

Without the European economy shifting into gear providing a quantifiable reason to buy Euro’s, in this low yielding G-10 environment, it’s still costly to short the USD.

And while U.S. exceptionalism has been questioned after the ISM report, given the considerable economic benefits the U.S. economy could receive if a trade deal is forged supporting that very same U.S. exceptionalism trade, it suggests the U.S. dollar may not suffer a knockout blow anytime soon.

Safe-haven currencies like the CHF and JPY have been the biggest losers as risk sentiment has shifted considerably less doomy.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Deja Vu All Over Again

This news reverses out some of the trade optimism that was dominating overnight flow as investors were hoping that at minimum, some type of a deal could be forged.

So instead of debating how encompassing the deal might be, investors are now back to plucking petals from a flower guessing if there will be a deal at all. Whatever level of trade calm there was,  just gave way to the fact how tenuous any newfound sense of trade war neutrality is in this environment.

However, with the U.S. administration opening economic wars on multiple fronts with China around human rights violations and potential capital flow, this could get much worse than current price action suggest. Indeed, regardless of what comes out of these trade talks, it could be little more than a case out of the frying pan and quickly into the fire again.

A Mini deal is still possible

A mini deal with China would be favourable, but whether it is merely a detente (no new tariffs) or something slightly more substantial (rolling back some tariffs) that’s the big question for how intense the risk revival extends. But regardless, investors would revel at any sliver of optimism for no other reason than gnawing uncertainty would abate.

Trading the risk

I wrote this before the SCMP news broke, but I thought better to include as we might get another headline shift, or who knows maybe even a trade deal before the days out.  

An obvious point of reaction will be how the market reprices both the Fed and the ten-year U.S. Treasury yields on a positive trade talk outcome. With much of the data unlikely to shift immediately, the expectation for easing through December 2019 may not change dramatically or instantly. But a trade war detente + rolling back of tariffs could see some significant repricing of the 2020 Fed curve.

According to the latest commitment of trader data, the pain trade is for a better deal than the market expects given that the street has adopted a defensive once bitten twice shy strategy ahead of the trade talks.

The commitment of Traders CFTC

The S&P index options are running bearishly at nearly 2.5 puts to call ratio, and Gold-backed ETF and Comex positions are running at or near record levels suggesting there’s a massive tail risk is if a deal gets hashed out. Defensive strategies look thick, so if these positions are triggered to unwind, it could exponentially amplify the risk revival on a positive trade talk outcome.

Oil markets

Oil prices struggled overnight as the Syria headline risk was no match for the EIA reporting a bearish build in crude oil inventories of 2.9 million barrels for the week to October 4 which of course was getting compounded by the EIA short term outlook report which is still too fresh in traders mind after it revised down its average price of WTI for 2020

And with oil traders wearing demand emotions on their sleeve, the high level of trade talk circumspect that is permeating every pocket of the capital market in the wake of the SCMP report offers little joy for oil bulls as oil prices are basically left weighed down by yet another trade war anvil around the market neck.

Traders likely have their finger to the wind trying to gauge the intensity of the latest headwinds but at minimum prices could be capped until the markets get some type of favourable headline tailwind at least.

Gold market

When headline risk continues to dominate flows, it’s virtually impossible to anticipate or predict the short-term movements given gold’s volatile nature to headline-driven shifts in trade war sentiment.

However, one arguably bullish read from overnight price action was the fact Gold remained firmly supported well above the $1500 pivot despite firmer U.S. yields and the SPX trading over 1 % higher. The spot gold skew remains firm, but demand is now shifting to the back end of the curve as investors insatiable appetite for haven and all things gold continues to resonate.

With the U.S. administration opening economic wars on multiple fronts, weak global financial data and a Fed likely to cut interest rates in October, all of which could continue to prove a substantial tailwind.

Currency markets

Deja Vu all over again. Weren’t we here yesterday??

The market is back on Yuan watch as the local traders have backed down expectations ahead of this week trade talks suggesting topside risk coming back into focus if  history repeats and the early September Yuan tumult holds. If this scenario does come to fruition, it could be flat out ugly for Asia risk markets.

So just as the Yuan led ASEAN currencies higher yesterday, it will likely lead them lower this morning.

With headline risk busting at the seams, it will likely be another fast money trading session. So, buckle in as you will probably end up staring at your screen at some point over the next 24 hours asking yourself “why “did I hit that button!! (BTW I’m not going to say “ I told you so”)

Downside USDJPY optionality has predictably started to pick up as risk aversion leaks into every pocket of the G-10 currency complex But demand is not that explosive relative to the surge of headline risk which could be a result of U.S. 10 Year Treasury bond yields sitting comfortably about 1.50 % suggesting interest rates differentials haven’t yet started to sufficiently factor negatively into the dollar downside risk equation. Instead, Yen is possibly trading on headline

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Clouds Gather Of The Trade Talks

It was a very disjointed 24 hours in global capital markets. Equity markets bounced higher when China retail resumed trading after a week-long holiday, but stocks finally ended up losing ground amid trade talk pessimism after a series escalating headlines raised severe doubts that little if anything will come of U.S.-China trade talks set to begin Thursday.

Chipmakers led the S&P 500 Index to a 1.6% loss, and Chinese companies that trade in New York sank to the lowest since mid-August as the Trump administration put visa bans on Chinese officials linked to the mass detention of Muslims in Xinjiang province.

Fed policy

Investors, however, took consolation in that the Federal Reserve will soon start growing its balance sheet again, partially in response to the recent surge to overnight lending rates in September. Overall, it’s a signal to a more-dovish Fed, which was expected and positioned for by the market.

But Chair Powell says that the three-month 157k average in payrolls is still above what the Fed considers to be the pace to keep unemployment stable versus new people entering the workforce. Suggesting the Feds are not getting bent out of sorts by a slowing in the headline payroll data, but it also suggests the Feds have benchmarked that if the three-month average were to fall below X, the Fed would likely transition from thinking of this as potentially a mid-cycle adjustment and more as a full cutting cycle. (X is believed to lie between 115-135 K headline)

Overall Chair Powell’s comments may not lead to a significant impulse for a weaker USD in the short or medium term. But given the shape of U.S. dollar forward curve, it is plausible if differentials continue to narrow throughout 2019. investors’ and corporate hedging behaviours could change which may result in a weaker USD

Brexit

As negotiations between the U.K. and E.U. flounder, it seems increasingly doubtful the two sides will reach a Brexit agreement. Financial markets will now turn to whether the Prime Minister will comply with the Benn Act and request an extension to Article 50 as the blame game look set to begin again.

Trade talks

With the recent U.S. trade war escalation headlines,  whether it’s on the human right front or even the war on capital, it suggests from President Trump perspective that at this stage of the election process a trade deal this week, will not offer up a significant enough policy victory that he needs to bolster his polling numbers against the gale-force economic and political headwinds he’s facing stateside. So, it’s back on the trade war offensive. Frankly, it’s incredible how my times the markets get sucked back into the trade war calm only to end up back in trade war purgatory.

Market skews

US-China talks, Brexit, economic data and Fed policy, are offering few positive investments skews but one dominant skew that is possibly emerging is that it’s getting increasingly more challenging to weave a convincing tale to remain anything but underweight in equity markets.

The good thing for risk markets is that investors who ” once bitten twice shy” were not pricing in a substantive deal instead wisely remained hedged as suggested by Gold-backed ETFs which are now sitting at an all-time high.

Oil markets

Oil prices remain driven by trade sentiment ahead of crucial US-China trade talks due to re-start this Thursday, but recent developments in the Middle East are starting to bring supply risks back into focus. And while the market remains untroubled regarding issues on the supply-side, the deadly protests continue in Iraq as Iran is reported to be extending its influence over a broad section of the population raising concerns about the stability of production from OPEC’s second-biggest producers. Cleary this will not go unnoticed by the U.S. administration. But since they are trying to put out economic and domestic political firestorms of their own, energies may have turned focus to internal concerns.

So, with global spare capacity arguably at a shallow level in the wake of the terrorist attack and geopolitical risks to supply rising, it might be enough to keep a temporary floor under oil prices.

However, with oil traders wearing global demand worries on their sleeve the skew could remain lower as the latest headlines are skewed trade risk-negative

Clearly, the last thing oil bulls need is for both sides to walk away from this week’s trade negotiation without at minimum hashing out a skinny deal.

Gold markets

Gold-backed ETFs are now at an all-time high after $3.9 bn of inflows in September.

Collectively, ETF holdings currently stand at 2,808 tonnes, the highest level ever recorded. And this could accelerate on trade war escalation and if the Pboc continues to unwind their European negative-yielding debt in favour of the yellow metal underlining its position as one of the leading central bank buyers of the precious metal.

It is virtually impossible to predict with any degree of certainty the short-term direction for Gold in these unsettled times. Although because of trade war unsettling nature, Gold prices could surge if these trade talks end on a contentious note.

Currency markets

The market is back on Yuan watch as the local traders have backed down expectations ahead of this week trade talks suggesting the 4.20 level is coming back into focus if the early September Yuan tumult holds. If this scenario does come to fruition, it could be flat out ugly for Asia risk markets. 

So just as the Yuan led ASEAN currencies higher yesterday, it will likely lead them lower this morning.

With headline risk busting at the seams, it will likely be another fast money trading session. So, buckle in as you will probably end up staring at your screen at some point over the next 24 hours asking yourself “why why why “did I hit that button!!

Downside USDJPY optionality has predictably started to pick up as risk aversion leaks into every pocket of the G-10 currency complex But demand is not that explosive relative to the surge of headline risk which could be a result of U.S. 10 Year Treasury bond yields sitting comfortably about 1.50 % suggesting interest rates differentials haven’t yet started to sufficiently factor negatively into the dollar downside risk equation. Instead, Yen is possibly trading on headline risk aversion alone.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

A Confusing State Of Affairs

Ahead of crucial trade talks the US blacklisted 8 Chinese technology firms while implicating them for human rights violations in China’s Xinjiang province. The Trump administration is walking the talk after raising human rights issues in Muslim-heavy Xinjiang at the United Nations last month and is escalating its economic war with China on yet another front.

This new shift in US strategy against China is now raising suspicions amid growing pressure stateside, that the administration may throw its support behind the pro-democracy protest in Hong Kong. All of which suggests a whole lot more than tariffs will be on the dinner menu when Chinese Vice Premier Liu He visits Washington for trade talks with his US counterparts.

Market participants are getting very jittery about all those US-China headlines -even the latest claiming China want to a partial deal while providing a timetable to work out harder issues are being met by investors with a high degree if circumspect.

A large percentage of the market thinks China may roll the dice and take advantage of what they think is President Trump weakened political state trying to push negotiation closer to the election data. In this context, President Trump may decide to hardball the upcoming talks suggesting there could be a high level of disappointment even relative to the market muted expectations.

The market continues to look unsettled, but the muted equity markets suggest investors are expecting to see very little progress from the trade talks this week. Still, if the October 15 and December 15 tariffs were to be put on hold indefinitely, it could be a significant catalyst for risk to sustain a bid at this point.

Oil market

Trade war headwinds and a dreary global macro outlook saw oil prices quickly erode early New York session gains after OPEC reported its most significant month on month output fall in 17 years.  However, the report was speedily digested as a result of the attacks on Saudi Arabia’s Abqaiq processing facility, and then the dominate economic doom and gloom saga took over for the remainder of the day.

The narrative is still very much focused on the macro with the fear of economic slowdown weighing on oil demand dominating sentiment, which is now at the weakest level since February this year according to data from the US CFTE and ICE future Europe. Both exchanges reported a 17% drop in combined net bullish positions in WTI and Brent.

Against that overtly bearish backdrop, and while it’s virtually impossible to predict with any confidence how these trade talks will unfold, oil prices could be in for a sustained rally if the October 15 and December 15 tariffs were to be put on hold indefinitely which could see some of the braver at heart to  support  dips  thinking the risk-reward skew is higher as much of the latest macro is baked into the price.

Gold markets

Gold prices fell when US treasury yields rose, and the US dollar subsequently strengthened as traders wait for the resumption of US-China trade talks. The market is going into the US-China trade talks with little expectations, so even the so-called “skinny deal” will be viewed in an extremely risk positive light. And if the next round of tariffs is put on hold indefinitely, we should expect a sustained rally on risk assets suggesting gold may lose some lustre.

The weaker global macro and the October Fed rate cut is thought to be very much in the current price, and with the October Fed cuts suggest the risk-reward may still skew to the upside. What may not be fully factored into the equation given how difficult it is to predict with any confidence, is a trade war detent which could send Gold prices tumbling as investors dive back into equities and global growth assets if such an outcome were to arise.

We continue to expect Gold traders to critique their positions against US bond yields while looking for clues from this week’s Fed speak and, some waver in the hawkish FOMC divide.

However, despite the dreary ISM data, it doesn’t appear that the more hawkish members of the FOMC are shifting their position. Kansas City President George said the recent moderation of growth was in line with her outlook but suggested she would be flexible is the data came out worse than she expected. She said she would continue to focus on the consumer while she pinned the recent strength of the dollar on the move by foreign investors to own US assets.

Boston Fed President Rosengren said the labour market remained tight and he was confident the consumer would continue to drive growth. In his view, if the economy grows at 1.7%, consumption remains strong, and inflation is gradually going up coupled with a low unemployment rate, so there is no need for further policy accommodation. 

Currency markets

The dollar weakness is on hold as has been the case this year the 1.10975-1.1000 marked strong resistance on the EURUSD. It’s as if we get to that level and trader then ask themselves given how dismal the EU economy is, if we don’t buy US assets what will we buy?

But there’s a lot of watching and waiting as traders reduce some of their risk aversion bets ahead of the trade talks with the USDJPY trading above 107.25

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

The Carnage Has Abated For Now.

It was quite a bounce on the S&P 500 after having dropped 35 points on the lacklustre ISM print, and it’s put all that and more back on again to trade higher on the day.

Is bad news good news still?  Indeed, that does appear to be the case after the markets fully priced in a Fed rate cut in October and price in  December suggesting that its monetary policy that continues to remain one of the essential drivers of investors sentiment.

On FX, the signal from the data is somewhat ambiguous; the weaker US growth could hurt USD against the safe havens such as JPY, but not against ASEAN EM and commodity exporter currencies. As such, an argument could be made that USDJPY is trading too high while USDKRW, the best proxy to express a weaker global growth bias is still trading too low. With that said, today could be more about pre-NFP housekeeping and pre-weekend position squaring so Asia Forex traders may have less of an axe to grind today.

However, sentiment remains weak and any weakness will be seized upon as further examples of a slowdown or recession but keep in mind the downward revision from previous high watermarks could be the most eye-catching and have been a consistent feature of the “ establishments” critical employment report, The  US Non-Farm Payrolls

Trade War Carousel

The  US-China trade meeting remains the critical unknown variable, and perhaps the most prominent toggle for risk sentiment.

The market continues to hope for the best while preparing for the worst that at minimum, the economic carnage inflicted by the US-China trade war will be enough to bring to fruition a partial trade deal. Where there’s a will, there is a way and as such, hope springs eternal.

While the market is still a bit shaky from the US tariffs on EU products on the back of the Airbus row, investors can take some comfort that one of the US’s biggest trading partners Japan announced today that a US-Japan trade deal is set to take effect in January

The EU tariffs are set to take effect October 18 which gives both sides a small window to negotiate, but with President Trump holding back on implementing tariffs on EU automobiles sadly for Germany and their vast automotive export complex, the worst might be  yet to come as the US tariff carousel moves into to full motion across ” the pond”

Oil markets

Concerns about global oil demand are rising, and next week’s US-China trade talks, the significant X factor, will be particularly important, given the sharp drop in the oil price over the last week. However, sentiment remains weak and any economic weakness will be seized upon by fast money traders suggesting the near term catalysts will likely be a function of oil demand

However, after Saudi Arabia quick response to the terrorist attack suggests that they have used up much of their spare capacity cushion to satisfy international export demands does leave global supplies a tad vulnerable to addition disruptions.

Now we have a sudden eruption of protest in Iraq, and the ensuing clampdown by security forces have brought some of this supply and geopolitical risk back into play. While the populist protests have not spread to Iraq’s primary oil infrastructure in and around Basra, there is no guarantee that the anti-corruption fervour won’t next set sights on Iraq oil fields.

Gold Markets

Gold punched above the USD1,505/oz on growth US economic concerns which implies lower US interest rates and that precisely what triggered the surge in Gold demand. In this context,Gold should remain well supported.

Gold traded in a narrow range in Asia and Europe yesterday but popped higher in early US action. The catalyst was disappointing US economic data which intensified concerns of a slowdown.

However, profit-taking was swift when the US equity markets rebounded just as quickly. After this week’s shell shocking market purge, gold traders may be just as content to ” take the money and run ” on rallies thinking that the weak US data and Fed comments are good short term impulses but remain incredibly cautious about a possible interim US-China trade deal.

However, one look at the resilient US equity market might be enough for investors to keep near term long gold position light.

Physical demand remains weak, suggesting these recent up and down moves are more about leverage paper gold impulse which sadly can quickly trigger takedowns that may scare ” weak hands” out of their positions.

Currency Markets

Euro 

Despite the lousy EU data and the revision lower on the latest round of EU services PMI’s, the EURUSD remains supported by negative risk sentiment.

However, traders appear content paying the current short-term Euro range goalposts 1.0975-1.1075 as it might be too early to call for full bore dollar weakness.

Although the Fed easing narrative is a primary condition for dollar weakness, a 25-basis cut in October and even a follow-up cut in December might not lessen the USD yield advantage significantly as other Central Banks could quickly follow suit.

So, until there’s evidence of the EU economic data improving, traders may still prefer selling EURUSD on moves to 1.1075-1.1100, but on a break above 1.1125-50, that strategy might then come into question.

Much is riding on tonight NFP report so saddle up it could be a busy night for the Forex cowboys.

Yen 

The market remains happy to sell USDJPY on rallies given the faltering equity markets; However, since the market has been selling USDJPY all week, traders might be content buying on dips ahead of the US employment report to improve their average on short position trade.

Commodity Complex

Commodity currencies may continue to fare poorly if oil prices continue to slide, which suggest both the CAD may continue to struggle.

Asia EM

Traders have been booking some profit in long USDAsia positions with the USD trading broadly weaker vs G-10 as the US economy is showing signs of faltering. However, nascent signs of a more fragile US economy are no cause for celebration for local economies which have massive export exposure into the US markets.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

A Calamitous Affair

Investors may have interpreted the US ADP report as further proof that the U.S. economy is slowing and possibly on the verge of a recession sending the S&P 500 to its first back-to-back drops of more than 1% this year and breaching the critical 2900 level.

The market was still digesting the weaker ISM data, and the implication for global growth then got whacked with the slide on the ADP data compounded by a precipitous decline in U.S. auto sales. Which now raises more questions than answers about the resilience of the U.S. consumer.

The equity market price action was telling as it moved well beyond cyclical stocks and growth reactionary higher beta sectors like Oil, Miners & Industrial but was broad-based suggesting that investors are not only taking chips off the table but might also be folding their cards.

Also, the U.S. levied E.U. goods with new tariffs greenlighted by WTO ruling adding another brick in the wall of worry for E.U. investors

Trade optimism could keep the risk on light flickering, but the dreary economic data does perhaps suggest that traders could be better sellers it this risk toxic environment.

Oil, slip-sliding away.

U.S. oil prices plummeted below $53 a barrel. Aggravating the week-long price slide was a government report indicating U.S. crude inventories increased. Which of course poorly contrasted the apparent one-off API survey draw that was thought to be a result of oil stores getting depleted due to the knock-on effect from the terrorist attack.

However, ignoring the inventory reports which have a propensity to swing wildly and forever miss ” analysts ” expectations. What’s impossible to ignore is the economic realities being signalled in the latest run of doom and gloom financial market data which offers few if any reason for Oil investors to be optimistic over the outlook for global demand.

While the near-term triggers may continue to relate to oil demand, next week US-China trade talks remain the unknown variable which could lend a modicum of support

All that glitters are gold.

The disappointing data out of the U.S. and Europe, as well as weak earnings reports from automakers this week, has equity investors looking to golds umbrella to wait out this building storm.

Gold and silver are both trading constructively as 10-year US yields push below 1.60%, with equities under pressure. The ten years low in U.S. manufacturing ISM is being taken as a severe warning sign. With the market risk lights shifting from amber to flashing red, gold and silver may continue to be the haven beneficiary as investors diversify away from risk assets.

Currency markets

Let the games begin
Its all about the leak in U.S. consumer data highlighted by the miss in private payroll and calamitous auto sales data

On the back of the weaker U.S. data prints, the USD has lost some of its shine from a growth differential prospect and with the U.S. yields toppling, a yield differential perspective also.

The SPX broke critical supports at its 50-day and 100-day moving averages, and risk sentiment continues to wobble. As a result, USD is struggling vs JPY and gold, but the greenback is holding up vs E.M. and higher-beta G10.

Even at 107 and change, given the global economic backdrop and potential for risk aversion to take hold the USDJPY may move lower but remains precariously perched tentatively bid above 107 support on possible trade optimism

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Sitting atop the FOMC “Wall of Worry”

Not only that, but its thought to be the specific chunk of the economy the President must also protect and the sector the US aggressive trade policies were supposed to enhance. So, the data could also imply not only monetary policy infusion is on the way but could increase the odds of some type of trade war détente.

The brutal US September ISM manufacturing PMI immediately repriced higher the likelihood of a Fed rate cut in October but what’s curious is that equities sold off in dramatic fashion suggesting even bad news is no longer good news. For equity investors

Moving into October, memories of Q4 2018 seem to skulk everywhere as the end of Q3 heralded negative risk appeal. The dreary ISM may offer further evidence that equities may be entering a risk aversion phase of the cycle. Back to back contractionary prints on the ISM compounded by the hefty sell-off on the S&P 500 could be the first signal that the Fed easing inspired equity market rallies could be a thing of the past as investors may interpret a Fed policy pivot to an explicit easing bias as the ultimate leading indicator of an ailing economy.

However, with that doomy gloomy view aside, if there was a time for global central banks and political leaders to defibrillate the markets while connecting an intravenous cocktail of easy credit and fiscal glucose, now is about as good a time as any.

Political uncertainty around elections and the impeachment saga does add an element of volatility. However, monetary policy matters more stocks than political events. Central bank easing is the primary driver of equity markets risks politics is headline risk.

Oil

Crude prices moved lower after the dreadful US ISM data which intensified concerns over waning energy demand as the US economy was thought the relatively stable footing

However, it’s not one singular data point rater its the current global run of gloomy economic data, whether its manufacturing devastation in Europe or flagging Industrial production in China, none of bit the economic data offer any reason for Oil investors to be optimistic over global demand.

Thankfully for Oil bulls, they were able to take temporary comfort in the fact The American Petroleum Institute reported late Tuesday that U.S. crude supplies fell by 5.9 million barrels for the week ended Sept. 27. Lots of narratives in plays so we could expect volatility and with limited follow-through after the initial spike there appear to be a reluctance to push the envelope higher in early trade.

But also pressuring oil price lower, Ecuador is reportedly indenting to leave OPEC 2020 which has created more fissures in the OPEC cartel as countries that are in dire need of Petro revenue don’t want to be shackled down by a production cut agreement.

Moreover, while their departure is unlikely to add a significant number of barrels to the global supply equation, it does provide negative compliance optics, and may even encourage other smaller members to follow suit.

AS usual, the oil markets are never short of narratives as only yesterday it was the Saudi oil infrastructure attacks were old news, and the focus is shifting once again to US-China trade.

Finally, yesterday, I didn’t focus enough attention to US EIA data that showed a 2.3% drop in US production in July vs. June and dismissed it as a weather-related disruption. However, that was far to narrow of a view. With rig counts dropping and onshore production falling if this trend continues and the market does conclude that US production growth is slowing it could be a significant and defining moment for oil markets heading into 2020.

Gold

Gold and silver both jumped higher on the back of the weaker US ISM data, and US President Trump was criticizing the Fed on Twitter. With short term speculative length thought to be shaken out a bit over the past several days, positioning is cleaner, as both metals may be poised to continue higher if US yield cooperate by moving lower Mind you the near term outlook will significantly depend on this Friday’s Non-Farm payroll data where its though that on the first sign of significant weakness in the employment data the markets are going to scream recession!

This latest Gold purge was a significant positioning wipeout. Sure, it was a bit of gold fever mini mania all the way up with one headline in August said: Buy Gold at any price. However, with more question than answers about why now, new gold investors will be less inclined to chase Gold higher as shellshock is still setting in. Even in my very well seasoned circle of Gold I traders there seems to be little consensus as to what specifically triggered the move.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Out with a Whimper

The tech sector was the overnight winner as investors continue to debate the trade war spin after the Trump administration whitewashed the broadcasting that it is discussing imposing limits on U.S. portfolio investment in Chinese companies. As a result, the markets accomplished little more than retracing Fridays sell-off overnight.

However, the latest markets shimmy is just the preliminary stages before the big dance contest October 10 when high-level trade negotiations restart. In the meantime, investors will go through their daily ritual of putting a finger in the air to test the trade war wind direction

Oil markets

Oil markets had a dreadful quarter as the global economic tumult eclipsed middle east unrest and the unparalleled terrorist attack on Saudi Arabia’s major oil facility.

Global economic data continues to run cold, and while there was a glimmer of optimism cast on yesterday’s China PMI data that came out a tad better than expected. Oil markets were not so enamoured as the middling prints were perceived nowhere near convincing enough for commodity markets that continue to struggle amidst ongoing US-China tensions. The current run of economic data offers little reason for Oil investors to be optimistic over global demand.

Also, Saudi production is ramping up more quickly than anyone expected following the September 14 attacks. Only two weeks ago, it was thought to be months and even years that were bandied around as a repair timeline. So, with the repairs headed for completion well beyond anyone’s expectations, there’s likely ample redundant capacity in the supply chain that was put in play as a safety net proviso, so there’s possibly abundant prompt supply in the global oil complex that perhaps exceeds current demand.

The possibility of a middle east military escalation continues to recede, and while the war of words is expected to extend, it’s unlikely to have a significant impact on oil prices. Moreover, neither will the US patriot missile system which is expected to be deployed for defensive measures only, as President Trump knows that any perceived offence military escalation in the middle east could send US crude prices soaring. Indeed, the Brent-WTI spreads are not suggesting traders are expecting a drastic drop in global oil supply.

The last thing President Trump wants is a rise in consumers fuel expenses which could harmfully impact broader US retail consumer spending habits. After all, the US consumer has singlehandedly bolstered the US economy for most of 2019.

Also, its possible oil traders woke up and smelled the coffee on Monday picking up on the fact that there may have been considerable downside volumes in play last week as the oil market has toggled bullish to bearish in fast order. While it’s possible at times to trade up a mean reversion storm in oil futures, however, consistently swimming against the tide in oil markets can be a hazardous proposition at the best of times.

Gold Markets

The $ 1480 trap door sprung which was thought to be a significant intersection of CTA second level stops, a critical technical resistance level and trigger point for fundamental analysts.

Gold struggled with little exacting news, but a massive shakeout like occurred overnight is usually a result of a confluence of events.

The latest commitment of trader’s report showed the most significant rise in the COMEX gold position since early August while gold ETF continued to make substantial advances. This position build confirms the market was extraordinarily unbalanced and possibly prone for a correction.

On the technical front, last week gold took out its 50-day moving average and parabolics reversed downwards.

The US dollar remains strong, indicating the greenback was hoovering up its fair share of haven flows and making gold more expensive to own globally.

Physical demand remains weak, which may have iced the rally and contributed to the 24-hour slide

Moreover, while the Trump administration talked down the broadcasting that it is discussing imposing limits on U.S. portfolio investment in Chinese companies, but that doesn’t explain the full extent of the move to the low $1460.

Possibly. Gold traders are now thinking the FOMC aggressive easing narrative may have reached its expiration date with traders now waking up to the fact that policy centrist like Fed Evans continues to double down on their hawkish rhetoric.

However, the most significant selling catalyst may have come from one of the most influential central bankers of this decade, coming on the heels of Mario Draghi in an FT interview. FT (paywall)

He said higher government spending was now more urgent than before to counter the global slowdown. More government support would help ease the pressure on the central bank as well as reduce the length of time extraordinary monetary policy remain in place

Draghi interview may have been interpreted as another central banker walking back from the zero lower bound abyss, which may have set the gold ball falling which was then exacerbated by the massive waves of stop losses triggered along the way.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

U.S. Trade War Shifting To A New Front: a War On Capital?

Weekend News

U.S. TREASURY SAYS NO CURRENT PLANS TO BLOCK CHINESE LISTINGS

The timing of this story right on the cusp of another round of high-level trade talk between the worlds most massive economies adds another layer of muck to an already befouled trade war narrative. Moreover, without a complete walking down of this aggressive US posturing, the latest trade war salvo may continue to hang over the markets like a foul stench as storm clouds continue to gather on the horizon.

Investors may still need to do a bit of soul searching this morning, at some point, it is possible that the U.S. trade war shifts to a new front: a war on capital. All of which suggests the markets may remain in a defensive posture until further notice.

With the US bringing focus on China’s debt rating agencies, it opens a whole new can of worms and takes this highly competitive rivalry for global capital investment flows to a whole new level at a time when China has been opening their capital markets to fund the belt and road initiative.
When adding capital war to an already toxic brew of tariff war, impeachment noise and possible Iran escalation, it’s not exactly the best springboard for risk assets suggesting equity market volatility may be the name of the game in the weeks ahead.

If there was ever a time that the markets needed a trade war break though, now is about as good a time as any.

Capping capital flows to China

However, assigning a risk factor to a financial market ruination scenario of this magnitude is next to impossible. Still, if a war on capital is the new face of the trade war and the Trump administration imposes limits on U.S. portfolio flows into China, it will make the current tit for tat tariff escalation look like a board game of axis and allies.

While this is an evolving story and the theoretical magnitude of the impact near impossible predict, it may well be argued that it could be exponentially more damaging to the global economy than the current level of the trade war.

Fortunately for risk markets and before traders in China and Asia have a chance to engage these headlines today, the US Treasury on Saturday talked down Friday’s hysteria saying there are no current plans to stop Chinese companies from listing on U.S. exchanges.

However, at some point, it is possible that the U.S. trade war shifts to a new front: a war on capital.

Chinas debt rating issues

China’s bond market is opening to foreign flows big time and their debt rating system, murky as it is, has never experienced a harsh test from the markets. Moreover, as mainland economic fissures appear left, right and centre, now with trillions of foreign inflows funding President Xi BnR initiative, isn’t it prudent for U.S. regulators to be concerned?

Indeed, this would seem to be a very reasonable concern. Even prudent. However, the problem is that U.S. investors welfare was likely the last thing playing on the administration’s mind when they floated this news on Friday. If anything, the news leak appears consistent with the US administration intensifying their brand of scorched earth trade policy where no one wins, and everyone gets burned.

The Yuan and the US dollar

The Yuan’s adverse reaction to the news runs contrary to the U.S. administrations trade policy suggesting if President Trump were to consider capping US investment into China, US policymakers would need a counter lever to weaken the U.S dollar.

Hence the reason why a recent bipartisan bill submitted in the US Congress calling for higher taxation on capital inflows into the US to undermine the dollar may return to focus. — Applying a withholding tax to foreign investment flows would the equivalent to the Federal Reserve Board (Fed) cutting rates, something which the US President has been pushing. Importantly, the narrative towards taxing foreign capital has been openly adopted by US Democratic Presidential nominees as well.

The politics of taxing capital flows

If there is one thing democratic nominee Elizabeth Warren, who is surging in the polls, and President Trump agrees, its higher taxation on capital inflows into the U.S. to weaken the U.S. dollar.

Limiting U.S. government pension inflows into China is no small matter but taxing China inflows into the U.S. is massive as China is, of course, a much bigger player in U.S. portfolio markets than the US is in Chinas.

If the trade war does change fronts and starts attacking global capital flows, the policy may have dramatically negative consequences for the US dollar if the above scenario unfolds.

The greenback has had a remarkable haven run on the back of the tit for tat tariff war, but not all wars lead to a stronger dollar.

Oil markets

The long oil position bulge that grew across the curve after the terrorist attack has given way to position shorts that have returned to fashion as traders appear to be making a significant U-turn in strategy.

With Saudi oil production mostly back online, the focus shifts again to the trade war narrative and consequential demand devastation, which is getting intensified by the U.S. administrations possible capital clampdown as they investigate the efficacy of capping U.S. investment flows into China.
Indeed, when stop and reverse trading strategies kick in, they can have an exponentially significant impact on price action and far weightier than a simple cut and run exit strategy. All of which suggests there may have been considerable downside momentum in play last week.

Iran and oil

A war of words between the US and Iran is unlikely to have a significant impact on oil prices. Moreover, neither will the US patriot missile system which is expected to be deployed for defensive measures only, as President Trump knows that any perceived offensive military escalation in the middle east could send US crude prices soaring.

The last thing President Trump wants is a rise in consumers fuel expenses which could harmfully impact broader US retail consumer spending habits. After all, the US consumer has singlehandedly buttressed the US economy for most of 2019.

Economic data and oil

Economic data will be in focus this week and while the US data has been surprisingly resilient, but how long can this exceptionalism last. However, even if the US data held up the decidedly disappointing PMI figures out of Europe last week and the wobbly PPI and IP data from China on Friday offers little reason for Oil investors to be optimistic over global demand.

Baker Hughes rig count

Possibly feeling the glut but likely getting impacted by tighter capital constraints, US driller reduced the number of rigs by six last week to 713, the lowest since May 2017, according to data released by Baker Hughes on Friday.

Gold markets

The latest trade war salvo and its impact on U.S. bond yields and the US dollar may offer the best clues for Gold’s next direction. However, Investors may still need to do a bit of soul searching this morning, at some point, it is possible that the U.S. trade war shifts to a new front: a war on capital. All of which suggests the markets may remain in a defence posture until further notice which could be a welcoming environment for gold markets as investors may view a defensive strategy as the best offence.

Last week was a stressful time in the gold market as a multitude of crosscurrents saw gold prices rise early in the week only to fall into the weekend.
As any seasoned Gold trading veteran worth their salt will tell you trying to predict gold price movements over the short term is challenging at best given the number of paper leverage contracts that banks and fast money traders can use to trigger takedowns that may scare weak hands out of their positions.

The capital war headline impact on gold

Until the headline hit that the White House is weighing limits on US portfolio flows into China, prices were toppling. Gold was struggling with little significant news, which may have been a result of speculative fast money flow or even possibly one-off quarter-end portfolio reallocation related flows.

Sure, some of the market impeachment worries calmed when US President Trump released part of the Ukraine call recordings, and then he suggested a trade deal with China is closer than everyone thinks, but that doesn’t explain the full extent of the move to the mid $ 1480s

Indeed, more tangible trade calming news flows could send US bond yields higher, leaving the massively longs COMEX and ETF gold positions prone to a significant correction.
Gold and Fed speak

Also, for gold markets, it’s possibly all about Fed amid a growing awareness that the FOMC aggressive easing narrative may have reached its expiration date with traders now waking up to the fact

that policy centrist like Fed Evans continues to double down on their hawkish rhetoric as the Fed rate cut probability in October recedes. Not the most bullish view for Gold markets at all.

Gold and weak physical demand

While the COMEX and ETF demand have remained robust, there is a significant element of the market missing in action. Physical demand remains weak and too could have helped ice the recent rally.

Physical demand is typically high this time of year. Usually demand out of India tends to be very strong in the lead up to the wedding season and ahead of festivals while physical buying from China tends to pick up preparation for peak demand around the Lunar New Year. The consumer demand is not there. Which is a bit of a concern for gold bulls who typically expect decent demand in the physical market from India over Diwali

Gold investors on the sidelines?

The other possibility is perhaps gold investors have taken to the sidelines preferring to wait until all quarter-end flows are through before re-engaging.

ASEAN Currency Markets

It’s unclear if the so-called war on capital is but a tempest in a teapot or something that will trigger nightmares from here to eternity for emerging market traders. However, with the US Treasury on Saturday, talking down Friday’s hysteria, it was a much calmer open than expected.

However, with the Yuan completely in trader crosshairs, any thoughts of having a peaceful week on RMB desks over the Chinese long holiday might have flown out the window with the latest round trade/capital war escalation.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

A Tempestuous Day in The Trading Pits

The market isn’t clear on what to make of the latest impeachment developments in the U.S., and this continues to increase uncertainly and could be weighing on investor sentiment.

Compounding this uncertainty is the stark reality that most of the global economy is moving in reverse while omnipresent geopolitical unease ensures the market remains in a constant wobble on a forever shifting trade war axis.

The robust U.S. economic data suggest the world’s largest economy remains on a solid foundation, adding to the U.S. dollar haven and growth differential appeal. Indeed, if US consumer were worried about the negative fall out from trade wars, it’s certainly not stopping them from making the most significant purchase of their life as US new home sales are now surging thanks to the Federal Reserve Boards accommodative policy.

However, the market does appear to be more concerned about US-China trade the and investors reaction function could significantly depend on what direction and intensity trade war winds blow. Sort of like an ambling hot air balloon.

Still, the market remains in limbo trying to decide how the ” whistle-blower ” impeachment push may impact White House decisions on trade negotiations.

Oil markets

Don’t toss the geopolitical risk premiums out with the water just yet.

Oil changed course higher after the US made public their intention to beef up air defence systems and send troops to Saudi Arabia in the wake of last week apparent Iranian state-sponsored terrorist attack. Prices rose on the fighting chance of military action which could destabilise the region and undermine global supplies.

However, also this move could be viewed as a US show of force as Iran continues to skirt its 2015 nuclear agreement which adds another layer of geopolitical risk ingredients to the mix.

However, for most of the week, and this is where the real oil price risk possibly lies. The market has been trading lower as oil bulls have been discouraged by quicker than expected return of Saudi oil output. Even more so as the market now pivots to the start of US refining maintenance season as operators switch seasonal product blends. So, the expected lower demand for oil inputs into refineries typically sees US crude inventories swell. All of which could pose a significant downside risk for prompt oil prices.

Gold Markets

Treasuries rallied Thursday led by long-end of the curve amid weakness in U.S. stocks following the release of whistle-blower complaint central to House impeachment inquiry; session highs were reached during U.S. afternoon after strong demand for 7-year note auction

However, the mild risk-off moves and uptick in geopolitical risk failed to inspire the gold markets aren’t correctly showing off its safe-haven attractions as the strong U.S. dollar is competing for haven flows and keeping gold investors on the sideline even more so as EURUSD continues to threaten 1.0900 levels.

Also nascent signs that even the most dovish central bank in the world, the RBNZ, appears to be walking back from the cliff edge of rate cut mania and when taken in the context of Fed messaging from earlier in the week when Fed’s Evans doubled down on his hawkish remarks, its not the best of near term bullish narrative for gold investors

For the time being, the $1,500 level is acting as a reliable support, but at some point, if you push against something hard enough, it could give way eventually.

Currency markets

The Yuan

The Yuan bulls may be slightly disheartened today as in somewhat of a surprise move the FTSE Russell skipped adding Chinese bonds into its flagship World Government Bond Index, But Chinese “Govies” do remain on the watch list for a possible upgrade which does take some of the stings out of the snub.

The Ringgit

Malaysia remains on FTSE Russell’s watchlist for a potential downgrade. While not the ideal scenario for Ringgit bulls it’s far from a knockout blow to the Ringgit already shaky at the knees from the trade war tumult.

The FTSE could be playing hardball while trying to call upon the BNM to reintroduce an NDF market, something that offshore bond investors have been clamouring for some time.

US Dollar

Today could be a bit of a litmus test for US dollar sentiment.

Elizabeth Warren is climbing in the election’s polls, and it’s thought that a Warren presidency would be detrimental for US asset if her wealth tax were introduced.

However, just as significantly the market will soon put the quarter-end USD funding squeeze in its rear-view mirror.

The global central banks seem a bit less eager to live below zero, as per the latest RBNZ musings.

US stocks continue to struggle at 3000 which doesn’t precisely exude USA exceptionalism.

While from a technical picture the triple bottom EURUSD format 1.0925-1.0910 may hold some USD short appeal.

If the US continues to surge into the weekend that could be interpreted as a bullish sign

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Light at The End Of The Trade War Tunnel

Investors have been “trade war” bearish for so long that any sliver of optimism is cheered. However, with definite signs of a thaw emerging the trade calm certainly trumped the impeachment probe as the S&P 500 halted a three-day slide, the dollar rallied, and yields on 10 U.S. Treasuries rose towards 1.75%

The limited deal with Japan is enormous on two fronts. First, it suggests the President is open to ” interim ” trade deal possibly signalling he is willing to negotiate one with China. Second, the agreement with Abe is a massive win for U.S. farmers as it will eliminate or reduce tariffs on 7.2 billion of U.S. food and agricultural products (USTR).

The U.S. Farm Belt has been in a world of pain from the escalating trade battle. However, the U.S. food agricultural sector is precisely one of those segments of the economy that a President must defend. Next up, the manufacturing industry?

On the broader picture, it provides excellent optics to rural America and will solidify his approval rating in areas that effectively won him the presidency. Indeed, this could be a critical foreshadowing of things to come as the U.S. administration, given the political thunderheads forming over capital hill , will be looking to protect as well as distance the President from the impeachment process and what better way to do that than put pen to paper on a US-China trade deal , even a limited one.

Oil markets embrace a trade calm reprieve

Oil futures got a reprieve from the selling onslaught as prices got up off the mat due to the trade thaw. Signs of easing trade tension has overshadowed the bearish raft of indicators that saw oil prices topple head over heels this week. Investors have been clamouring for any positive sign from President Trump on the trade war front, so the calming trade news flow may be convincing enough for traders to take even more bearish chips off the table.

Oil prices have been under pressure all week on reports that Saudi Arabia was doing fast work on restoring output after the terrorist attacks. However, price action has been exacerbated by blustery bearish headwinds.

Those reports were verified as Saudi Aramco has restored Saudi Arabia’s oil production capacity to 11.3 million bpd—the level before the attacks on oil facilities Reuters Reuters

Additionally, people in the know at Aramco told Blomberg Bloomberg

So, with the supply risk premiums evaporating and the oil fear factor but a distant memory. Demand worries are back competing for attention after the global manufacturing slump worsened this week after the German PMI point to and economy on the edge of recession

Also, the oil market is dealing with another unexpected crude build as stocks rose 2.4 million barrels which is bearish relative to consensus

Gold markets rocked in two front.

The more tangible trade calming news flow sent the U.S. dollar surging and bond yields rising while leaving the massively long COMEX and ETF gold positions prone to a significant correction.

Gold, higher U.S. yield and a strong U.S. dollar simply don’t make for good bedfellows.

While the COMEX and ETF have remained robust, there is a significant element of the market missing in action. Physical demand remains weak and too could have helped ice the rally

Physical demand typically is a high point for the gold market at this time of year Usually demand out of India tends very strong in the lead up to the wedding season and ahead of festivals while physical buying from China tend to pick up preparation for peak demand around the Lunar New Year. It’s not there, and this is a sector of the gold complex that quite possibly should not be ignored.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

The DC Impeachment Quagmire Thickens.

In the semantic quagmire known as Capital Hill, proceedings have turned decidedly mucky as the impeachment quagmire quickly thickens suggesting that Washington’s (DC) political swamp might not be able self drain this time around. Even more so, as the Democrats may have the numbers on their side suggesting the political storm clouds building over the Foggy Bottom are unlikely to dissipate anytime soon and could open with a deluge at any time leaving DC political landscape scarred and irreparably tarnished.

According to a tweet from a Politico reporter, 23 out of 44 of the Democrats’ most hardened swing members now support the impeachment of US President Trump.

There are 435 seats in the House of Representatives, and a simple majority of 218 is required for impeachment. There are 235 Democrats, 199 Republicans, and 1 Independent in the House. If you assume that all the non-swing Democrats vote for impeachment plus the 23 swing members, that makes for 214 Democrats. That is four Democrats away from getting the 218 votes required.

Stocks tanked whipsawed by fears of US political unrest sideswiping investors at a time when geopolitical angsts and trade war uncertainties mire investor sentiment.

Trump’s speech at the United Nations (UN) lacked any semblance of endearment towards China, but instead, he used this opportunity to reignite US-China tensions while renewing his attacks on America’s largest technology companies.

Gold Markets

Gold hit the highs of the day when news of potential impeachment of US President Trump hit the wires. The perceived odds of which, according to “Predict It “rose to 59% this afternoon from 31% two days ago. Stocks and yields are both lower, which is supporting Gold as well.

Gold sprang to life and is now managing to put some substantial distance from the $ 1500 pivot level for the first time in two weeks.

Keep in mind this move is also getting exacerbated by weak macro surveys in the wake of poor Eurozone PMIs on Monday and the huge miss the US September Consumer Confidence data.

Indeed the move on Gold looks convincing enough to warrant some attention as its unlikely the political storm clouds over Washington are about to dissipate any time soon which might continue to weigh on equity market sentiment, possibly send US yields lower and could undermine confidence in the US dollar. Indeed, these factors could be viewed as the holy grail of bullish Gold price indicators if there was ever such a thing.

Geopolitical risks are high in Iran and Hong Kong. Neither Brexit nor trade wars are likely to be resolved. The US presidential election next year looms large, and a possible impeachment is rising even more massive. All of which suggests Gold could be in demand

The Conference Board noted that “the escalation in trade and tariff tensions in late August appears to have rattled consumers. However, this pattern of uncertainty and volatility has persisted for much of the year, and it seems confidence is plateauing. However, the survey results around the labour market don’t look encouraging since its these negative labour market perception which eventually feeds into consumer spending behaviour. This revelation in the data is quite significant as the US consumer has been singlehandedly buttressing the US economy this year.

Oil Markets

Oil prices have been under pressure all week on reports that Saudi Arabia was doing fast work on restoring output after the terrorist attacks. However, price action is getting exacerbated by a plenitude of blustery bearish headwinds.

Futures dropped nearly 1% in New York late Tuesday after the American Petroleum Institute reported an increase in oil stockpiles. That followed a hefty + 2. % drop after President Trump uncompromising United Nations speech where he flayed China during his UN address today, accusing the nation of breaking promises to the international community to “adopt promised reforms.”
While the broader risk markets continued to skirt the terrorist event as a one-off phenomenon, those lingering demand worries are competing for centre stage again after global manufacturing PMI plumbed the depths this week which is returning focus to trade wars economic devastation.

The other issues the market is left dealing with is this soupy impeachment process that might occupy the administration’s resources, reducing the odds of more meaningful progress on the trade war front. Mind your things were looking muddy on that front even before the impeachment storey broke after Trump lashed out at China during his UN speech. Not to mention China might sit back and watch the impeachment saga unfold.

Still, there remains much focus on the restoring of Saudi output, especially given the extremely ambitious timeline offered up by Aramco executives.
However, as blustery headwinds continue to howl, I suspect only the most ardent oil bull would step in front of this gale.
Currency Markets.

Extremely murky markets for the dollar to navigate as political storm clouds build over Washington threating to undermine investor confidence in the US dollar

RBA and the Australian Dollar

RBA Governor Lowe says the economy has reached a gentle turning point and that further monetary easing may well be required. However, the RBA primary narrative confirms the growing sense that central banks are less keen to cut at these low levels than even a few months ago. The supports our views central banks will maintain a jogtrot, not a sprint to zero. So, the RBA rate cut probabilities have predictably fallen from 84 % to around 65 % today. Also, the RBA has a proclivity to move rates at SoMP meetings (FEB, MAY, AUG, NOV) so while easing bias is still in the cards it could be pushed out to November which might give the Aussie dollar a longer reprieve.

RBNZ and the New Zealand Dollar

However, one central bank that remains in the spring to zero is the RBNZ, but more on that after the rate decision, where everyone is likely lined up to sell on any NZD uptick.

The New Zealand August trade deficit NZD1,565.0 million vs NZ$1,400.0 million n consensus adding more downside momentum to a defenceless Kiwi dollar

Mexican Peso

MXN funding exploded higher, with overnight swaps cost implied trading above 11%. It appears everyone was caught long USD balances with a no-arbitrage left to take out it left traders scrambling to cover short MXN through the near dates. So, if you are long Mexican Peso, it comes and an unexpectedly excellent opportunity to pick up some yields.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Markets Stumble And Bumble To Start The Week

Australian manufacturing PMI was 49.4, the first time below 50 in this cycle. Eurozone PMIs fell further, led by Germany, as manufacturing continues to contract to an atrocious decade low level with contagion to services starting to appear broadly. Which provides a stark reminder to investors of the economically damaging effects trade wars and Brexit are having on business sentiment.

According to the IFO and ZEW survey don’t bet on a dramatic upgrade in the German economy anytime soon. However, most damaging of all is if the sub-zero borrowing cost is insufficient to get companies to spend again, it does suggest that the German economy is but a step away from mushrooming into a full-blown worst-case scenario, a full out recession.

The weak European PMI’s triggered as significant rally across all fixed income with the US bond markets leading the charge. The US curve, as it is so prone to do recently, is bull flattening, taking its cue from Europe. All of which provided a convincing signal for investors to seek shelter under a Gold umbrella

US equities ended the day flat to small down in low volume trade after US data rolled out mostly in line with expectations while placating some of those recessionary fears triggered by the European data.

As well, investors sentiment remained bolstered by the supportive Fed policy, which assuredly remains standing in the wings ready to act at a moments notice. If it were left up to Federal Reserve Bank of St. Louis President James Bullard, who resonates with many market participants these days, the monetary floodgates open next month.

Oil markets

Oil price eventually rose 1% in New York despite a battle of the repair headlines, and the ugly European PMI prints which sent oil tumbling lower initially.

Those dreary, soft data PMI’s do at minimum suggest that investors fragility over demand worries could start to compete for centre stage in the oil markets again even more so if US hard economic data starts to weaken noticeably.

Crude oil fell over 2.5% at one point yesterday after Reuters reported the Saudi Aramco facilities damaged in last weekend’s attacks would be back to full production by early next week. This conflicts with weekend media reports that it may take several months for total output to be restored.

Wherever the truth may lie, which is usually somewhere in the middle, the oil market might remain focused on Saudi spare capacity as well as geopolitical risk in the region for the next while — suggesting that oil prices could remain supported through higher risk premium, despite the dreary European data, and until there is conclusive evidence that Saudi Arabia can deliver on their repair timeline.

Gold markets

Gold rallies on global slowdown jitters despite a resoundingly strong USD dollar While geopolitical and trade war risk continue to offer support.

However, so far investors appear content to take some chips off the table on moves to $ 1525 suggesting that the thought of progress on the trade issues could be a significant barrier to breach ahead of the October US-China meeting unless of course news flows suggest otherwise.

What should be great for Gold prices and more concerning for policymakers is that contagion to the services sector is starting to appear with private sector activity shrinking for the first time in 6-1/2 years in September while eurozone business growth stalled

Indeed, if these macro conditions continue to deteriorate, there will be only one direction for gold, and that could be to the moon as the markets may continue to price in more Fed accommodation which will drive bond yields lower making gold even cheaper to own.

With the trade negotiation signal completely obscure it too suggests investors may continue to maintain a more defence risk posture until something more definitive unfolds after all one bitten twice shy continues to resonate post-G-20 in Osaka.


Asian currency markets

The Yuan

Price action continues to suggest that the markets think both China and the US are keen to make some trade concessions in October, so interbank types continue to offer up substantial resistance above 7.12 But with that said, the market remains stubbornly bid on dips possibly signalling that traders do not want to have too much short dollar risk on board with uncertain USD funding costs and even more so when Yuan liquidity turn south over the October 1st – 7th 2019 China National Holiday.

The Malaysian Ringgit

The Ringgit has been struggling to claw back lost ground after the USDCNH traded up to 7.1299 on EBS after Chinese officials unexpectedly cancelled US farm visit on Friday, which had a negative effect across all ASEAN currencies but triggered significant local equity outflows. Moreover, confirming this Bloomberg reported that Overseas investors withdrew $ 40.7 million for Malaysia equities on Friday.

However, the major elephant in the room is not just a wary retracement of the early September US-china goodwill measure, but traders may be adopting a more cautious approach ahead of the FTSE Russel decision which could see the Ringgit topple if Malaysia gets removed for its World Government Bond Index.

The Thai Bhat

The market is pivoting to the Bank of Thailand policy meeting on Wednesday so failing any trade war outbursts; range trade could persist.

In a Reuters poll, most economists (13-20 surveyed) expect the Bank of Thailand (BoT) to keep its policy rate unchanged on 25 September, but market participants will be looking if the BoT strikes a dovish chord to set up for a cut in November. Keeping in mind, the BoT surprised the market with a rate cut in August but remain very wary over the strengthening baht.

The BoT continues to express concerns that the baht’s strength relative to trading partners’ currencies could affect the economy to a more significant degree amid intensifying trade tensions. All of which suggests they could remain on an easing bias

Indonesian Rupee

The Indonesian Rupiah continues to trade relative flat waiting for the next signal on US-China trade war developments

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Quadruple Witching Day Ahead: Heavy Traffic Expected

No longer are investors happy with the Fed hitting the minimum of rate cut expectation, it appears they now demand a holiday surprise.

However, maybe investors took one look at the calendar and decided to take a pass as Friday quadruple witching day looms ominously. After escaping this week no worse for the wear, no one wants to get steamrolled by a possible surge in volatility as the IMM expirations are expected to create a massive traffic zone later today.

The Fed fallout

If the Fed was suggesting that it is done for the year, the market doesn’t appear to be listing. This point is nothing new as the market decided long ago that it was right, and the Fed was wrong. Moreover, looking at US news flows from overnight, it appears little has changed in that narrative. In other words, “trade war” concerns supersede consumer and labour market strength.

At the end of the day and despite the accommodating move in the dots, the barrier to ‘out dove’ the rates markets remain high, suggesting there could be more disappointment to come.

Oil Markets

Oil markets are giving Saudi Arabia the benefit of the doubt they can deliver on the optimistic timeline for the restoration of production following last weekend’s attacks.

Doubts leaked into the equation after reports that Aramco was looking to import crude oil for its Saudi refineries sent oil prices higher( later denied) — leading oil speculators to surmise the repairs are not going along as smoothly as hoped and that Saudi Arabia oil stores are not as ample as had been assumed.

Prices then fell as tropical storm Imelda drenched the heart of Texas oil country with a reported 25-40 inches of rain. The deluge has caused extensive flooding has forced the shutdown of crucial oil pipelines and causing disruptions at operations at the US Gulf Coast terminal. Due to the severity of the flooding, it’s expected to weigh on the demand for domestic crude while delays at key export hubs could occur.

Still, even with the fall in prices, the forward curve remains bid as traders are hedging that the initial estimates for the duration of repairs, given the complex nature, could well underestimate the time required. All of which continued to keep a bid under prompt oil markets

Also, the politics of war continues to move in the background. While US Secretary of State Mike Pompeo said, President Trump wants a peaceful resolution. Saudi Arabia foreign minister Al -Jubeir was not as amenable, suggesting that “complacency toward Iran will encourage it to commit further acts with implication for the world. All the while, the US continues to build a sturdy collation to hammer Iran with sanctions as a primary deterrent which is causing Iran to lash out.

As we head to the weekend, traders are very reluctant to give up the so-called ” lottery ticket trade.” (spike to $100) The market continues to price in higher geopolitical risk, with the full-length forward curve now steeper than it was pre-attack Given the level of uncertainty into the weekend, prices could remain skewed to the upside.

Gold Markets

For a trade supposedly hinged on a uber dovish central bank narrative, gold has remained remarkably resilient on dips — garnering support from geopolitical risk in the Middle East and the lower for longer central bank interest rate narrative.

The long Gold trade continues to resonate with investors as it provides the ultimate hedge against recessionary fears which remain elevated. Moreover, as US-China trade tension persists, it will likely force the Fed’s hands to cut interest rates later aggressively.

While the market does remain vulnerable to a near term correction, especially as the market continues to debate Fed policy, and improving trade news flows could take some of the shine off owning gold. The markets proclivity to buy gold in dips suggests any correction could remain shallow at best.

Yuan watch

The Yuan remains at the epicentre risk markets in Asia. The Yuan is the critical bellwether gauge of trade war sentiment as well as the outlook for the world second-largest economy. But with the market is looking out for any updates on the working level meetings between China and the US this week and US Congress reviewing the bill to support Hong Kong’s pro-democracy protesters, there are even more uncertainties at play than normal.

Australia Markets

The explosive rally in the Australian fixed-income market has grabbed more than a few trader attention after the jobless report brought forward expectation of an RBA rate cut. October RBA cut expectations are in bloom again as October is priced for 20bps of reductions.

The quick sell-off in the Australian Dollar suggests the market is nowhere nearly as prepared as they should be for possible RBA action. After all, traders had all but thought the rate cut story had run its course, and more easy money was all but a pipe dream after Jackson Hole when Governor Lowe said: “Monetary policy cannot deliver medium-term growth. We risk just pushing up asset prices.” Instead, he called for investment in infrastructure and structural reforms.

Since the Fed has apparently disappointed the uber doves and with a policy game-changing local unemployment report now hugely in play, the Aussie has traded with an offered tone since which could keep the market on a path for a test of the year low sub .6675 over the next few weeks.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

The Federal Divided Open Market Committee

The FOMC: Th-th-th-that’s all folks!” or is it?

The Fed’s central message is it’s done with rate cuts. But they may also be giving off the appearance of a highly divided group tasked with balancing the trade war malaise against healthy consumer and jobs sectors.

However, it is assumed by most economists the tariff damage will eventually cause US economic data to deteriorate which could lead the Fed to cut more.

With very few shifts in languages or nuance, the FOMC might be  perceived as a mild disappointment to those expecting a more dovish waxing as between the ECB and Fed; central banks are giving the appearance of walking back from the cliff edge of the rate cut abyss while only delivering on  the markets bare  minimums wants.

The supportive U.S. economic data gave the Fed a perfect opportunity to walk down some of the market’s dovish ambitions while holding back a policy deluge for rainier days. After all its about the data, isn’t it?

Not surprising rates markets reacted to the event in a volatile fashion, but this was possibly driven more by the unwinds of overly dovish bets rather than a shift in the overall rates market structure. The Fed message today, after all, is still consistent with Powell’s Jackson Hole speech where the outlook remained positive against a backdrop of trade uncertainty and downside risks.

Also, the net bottom line now appears that the Fed could maintain a gradual easing approach rather than either become more aggressive or even pausing for now.

Amid a funding crunch in the repo market, the Fed also cut interest on excess reserves ( IOER) which could provide enough grease and duct tape to  bridge the short term funding squeeze brought on by the Fed balance sheet unwind , the colossal amount paper floating in September nd of course as primary dealers are burdened to take on more supply .

Oil market

Traders appear less focused on the politics of war today while quickly turning to the reality of a speedy return of Saudi Arabia’s crude production amid market calming rhetoric from International Energy’ Agency’s Executive Director Fatih Birol who said the oil market remains well supplied with ample stockpiles, despite the weekend attacks.

Given that Saudi Arabia oil production will soon return to normal. It might weigh on supply risk premiums which were starting to build along the forward curve. However, with the weekend approaching traders could be more apt to maintain hedges against possible weekend headline risk especially in the absence of a measured response from the U.S. or Saudi Arabia

Also weighing on WTI prices, there was a less accommodating Fed than markets wanted while according to the EIA data crude stocks rose 1.1Mb, bearish vs consensus for a 2.5Mb draw and the 5-year average of -0.4Mb, and slightly above the 0.6Mb increase reported by the API data yesterday.

The markets will ultimately remain in a heightened state of alert as to how Saudi Arabia retaliates for the attack. President Trump has already walked back all his fire and fury now suggesting the U.S. will add “some very significant sanctions” and announce them within the next 48 hours. While Saudi Arabia, keeping in mind their position as the de-facto leaders of OPEC, frankly, they may not want to stir up a middle east hornet’s nest all of which is suggesting a more measured response.

So, with the U.S. and Saudi appearing more likely to take the sanction rout against Iran, it would not necessarily add to an already heightened level of supply risk premium.

Gold Markets

Gold initially fell as the Fed failed to meet the markets dovish forward expectations but held above $1480 thought to be a significant crossroads for fundamental and technical analysis. And gold prices have started to show signs of recovering after bouncing off support

by the trade war calm which could continue to lessen gold’s glittering attraction

However, its real rates are thought to be the long-term critical driver for gold now, while the dollar’s influence may be somewhat muted due to low volatility.

While we could see further corrections over the next few weeks as trade headlines continue to influence, ultimately, the lower for longer interest rates outlook could possibly lend support.

So, while we could see further corrections over the next few weeks as trade headlines continue to influence but its thought hat the lower for longer interest rates outlook might lend support

Currency Markets

The dollar is trading higher as F.X. traders possibly interpreted the Fed mildly more hawkish than expected. However, with the Fed maintaining a cheery outlook regarding the U.S. economy, suggesting that whatever stress test you want to put the dollar under, it may continue to come up smelling of roses and may not drift too far from the recent high watermarks.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Olive branches and Goodwill Gestures

Indeed, there’s some enchanting and extremely fortified alchemy at work as global equity markets remain supported not only by central bank easing but also the latest olive branch gestures from China that suggest a willingness to end or at least de-escalate the US-China trade hostilities.

Indeed, China’s olive branches have been so convincing that US President Trump has announced he will delay the tariff increase of  30% on $ 250 billion of China to Oct 15 offering a significant goodwill gesture that he too is willing to negotiate to put an end to this trade war spat.

Are both side ready to deal? The economic data shift says yes.

The U.S. side of the fence

There is one very good reason we should pay close attention to trade calming this time around as in the wake of the dismal manufacturing ISM reading in the U.S. this week, the economic cost of a trade war in U.S. voters eyes is rising quickly as the global manufacturing meltdown is now leaching into the U.S. manufacturing sector. Indeed, the weak manufacturing industry is not an ideal scenario for a run-up into the election year as the U.S. manufacturing sector is absolutely the chunk of the economy the President most wants to safeguard

The Chinese side of the fence

China trade data unambiguously confirms that softer global demand and U.S. tariffs continued to weigh on China’s export growth while accelerating drop in imports reflects flagging domestic demand.

Concerns of a more protracted trade war have already sapped business confidence in China. Regardless of which way you want to slice and dice the data at the end of the day it comes out bad, while the latest Chinese inflation data was the worst possible outcome and a policymaker’s nightmare.

Oil Markets

Oil came under intense pressure on a report that President Trump was mulling easing sanctions on Iran – something Bolton pushed back on. WTI has now given back all the gains from earlier in the week on the story that Prince Abdulaziz bin Salman will assume the top spot in the Saudi Oil complex.

However, temporarily plugging the oil market leak, the EIA inventory draw came out in line with API report. Crude stocks fell 6.9Mb, bullish vs consensus for a 2.7Mb draw and the 5-year average of -0.3Mb, and roughly in line with the 7.2Mb decline reported by the API yesterday.

Fundamental drivers all moved in a bullish direction with imports down and exports and refinery inputs up. With this week’s decline inventories have dropped below the 5y average. Historical inventory patterns suggest that stocks should begin to hit seasonal bottom sometime in the next 2-3 weeks.

There are three good reasons prices should remain supported specifically OPEC compliance, inventory draw and a possible trade war detente; however, there are between 500,000 – 700,000 reasons which suggest otherwise. Specifically, the approximate number of Iranian barrels that would flood the markets if US sanctions are lifted. Still, the closer we move to a trade war detent the higher oil prices will react.

We know the President wants Gasoline prices lower especially ahead of a what to be a hotly contested 2020 election. So, what better holiday Gift could the President offer up the US electorate than lower gasoline prices at the Pump.

Among the many gasoline-related conspiracy theories that flood the airwaves, there is the one that says national elections cause gasoline prices to fall. Prices do indeed tend to decline in the run-up to Election Day.

Gold Markets

Gold reversed early losses on expectations of monetary easing; as traders now look to ECB meeting for direction.

The uptick comes even though the equity market gains a strong dollar and an easing off-trade and geopolitical risk, factors which are all universally considered negative signals for Gold.

Fundamentally, expectations of further monetary easing by some of the major central banks provided background support for Gold.

Indeed, Gold markets were actively robust despite surging US equity markets primarily due to expectation of fresh monetary stimulus from the European Central Bank ( ECB).

Despite Golds 4.5 % correction lower from the highs, flows are still balanced if not better bid in the OTC today. Indeed, it appears wealth management types continue to have an insatiable demand for Gold on dips Intermarket reports suggest wealth XAU demand remains unabated, dwarfing the OTC macro position reduction.

The markets have pivoted to better sellers on the day, however, as the calming trade war effect of China’s latest olive branches and this morning US goodwill gesture is pointing to a decrease in trade war hostilities

Currency Markets

The amount of information leakage ahead of Thursday’s European Central Bank( ECB) meeting has been unusually thick, but the markets remain undecided if the ECB lays it on equally thick. However, the problem the ECB faces is if they make a deep dive below the Zero Lower Bound triggering a significant Euro sell-off, the US Treasury will object forcefully to any material depreciation. Are the ECB ready to take that gamble?

USDCNH dropped nearly 200 pips in thin markets on the Trump news as the Yuan traders are viewing this US goodwill gesture in a very trade war positive light.

The breach of 7.10, which gave way like a hot knife through butter and could be considered robust “risk-on” signal as the offshore spot had tremendous support at that level from reported real demand and from a technical backdrop perspective.

Moreover, regional currency markets will be in a happy place this morning as well as regional policymakers as a stronger Yuan offers local central banks more policy wiggle room to lower interest rates.

Bonds

Sentiment can shift on a dime as we’ve borne witness this week. In the last few months, the idea of aggressive easing at the zero lower bound was celebrated by many bond investors, where the Apex of rate cut mania was the Reserve Bank of New Zealand 50b rate cut. Suddenly it seems central banks are getting a touch of the cold feet, as indicated by the Bank of Canada when last week they threw ice water on the prospect of aggressive rate cuts. Perhaps in the central banker’s eyes, the actual data doesn’t seem to warrant such as response. So far, the idea of buying dips in fixed income thought to be a winning strategy has suddenly evaporated. It will be interesting to see how these central bank policy decisions play out.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

One Less War Hawk

There is no shortage of theories why equity markets are so resilient in the face of so much adversity. However, it may not be any more complicated than the fact global investors appear more than happy to run with the “ risk-on”  squeeze on the back of the latest positive short-term developments around the high -level Chinese trade delegation going to Washington in October; and anticipation of more central bank easing.

Also, the ouster of “America Everywhere” national security advisor John Bolton has a few tongues wagging this morning. While the move does not immediately signal a more amenable U.S. foreign policy, however, it does eliminate the most vocal advocate for US military-enforced regime change in the Trump administration. So, from a geopolitical risk perspective, it does lessen war risk premiums, especially in Syria, Venezuela, and Iran and opens the door to more friendly discussion with North Korea.

The Risk-Fear positioning index continues to drop, which is not so much about buying risky assets as it is about selling the overbought safe-havens as evidenced by the sharp risk reversal moves on Gold since last Thursday.

The US-China tug of war will continue, but there is growing sense that US-China sentiment may be shifting to a state of trade war neutrality. Where the likely outcome is that China could sweeten the pot by buying more U.S. agricultural products. Not what it will take to get to a full US-China deal, but it is the sort of thing that could be agreed to in exchange for a delay of the Dec. 15 tariffs. President Trump doesn’t want those, anyway, especially considering the recent run of weak U.S. manufacturing data which is not the ideal scenario for a run-up into the election year as the U.S. manufacturing sector is absolutely the chunk of the economy the President most wants to safeguard. Overall this would provide excellent optics on both sides of the fence as neither party would lose face. However, importantly for global investors, a Q4 trade war detente would probably mean no lump of coal in the Christmas stocking this year that was so unceremoniously offered up to investors last year.

Oil Markets

The full force of the “Bolton effect” hit oil markets like a ton of brick as Brent crude oil prices fell more than 2% after President Donald Trump announced via Twitter that he’d fired Bolton, a most vocal advocate for U.S. military enforced regime change in the Trump administration. Moreover, the most prominent war hawk towards Iran and Venezuela where production has dropped “40% and 48 % respectively “during his tenure as national security advisor according to industry data.

However, prices that remained supported on dips by the prospect of stiffing OPEC compliance, soon found their running legs when The American Petroleum Institute reported a large crude oil inventory draw of 7.227 million barrels for the week ending September 5, compared to analyst expectations of 2.6 million barrels. Indeed a considerable inventory draw is always a most welcome way for Asia oil bulls to enter hump day.

Gold Markets

In the wake of the rescheduled trade talks, Gold is showing the first signs of stalling out after a relentless summer long rally.

There is still a lot arguing for higher prices, but the chatter around the gold markets, both physical and futures, is far more balanced than at any time in recent months.

With hard Brexit looking less likely and the markets entering a period of trade war neutrality, the non-stop stream of downward price action suggests a higher propensity to trade Gold from the short side than at in time in the last few months.

There has been much focus on CTA positions this week as replication models are indicating a high level of de-risking unfolding, especially in Gold markets as last week CTA modelling indicated all 12 major strategies long Gold.

Currency Markets

While the pre-ECB housekeeping dominates the EURUSD, mind you price action feels like we’re walking through treacle, and as the bid tone continues USDJPY on improving risk sentiment flows. Local currency trader will remain vigilant to their daily Yuan fixation, which is expected to stay at the epicentre of regional and global currency market risk.

After US Treasury Secretary Mnuchin Monday said China’s currency practices would be in focus during the next round of trade talks. The Peoples Bank of China could stick to its modus operandi of keeping the Yuan on an even keel ahead of any major international event to avoid any perception of competitive devaluations.

The Malaysian Ringgit

Ahead of the Bank Negara Malaysia policy decision on Thursday, the market is reducing USD longs in the early goings this week. The JPMorgan Asia Dollar Index has rebounded significantly since the start of the month, suggesting that Global investors appetite for the riskier assets is increasing, which is bolstering ASEAN currency markets.

The People’s Bank of China effort at tempering the Yuan weakness is having a soothing knock-on effect across ASEAN currencies markets.

However, the most significant risk-benefit of a stable Yuan is its calming effect of de-escalating trade war hostilities given the U.S. trade administrations focus on all things, Yuan.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader