The S&P 500 recovered from earlier losses and ended the day nearly flat. US 10-year treasury slid 4bps to 1.82%, and oil was 1.5% lower at the Nymex close. Equities had weakened earlier in the session following reports a senior official saw some possibility the deal singing could be delayed, creating another bump on the long and winding road to an official trade truce.
The news caught the market amid profit-taking inspired consolidation mode as the market sentiment wave indicator had peaked. So, the headlines may have triggered a deeper overshoot than under normal circumstances. If President Trump is open to rolling back tariffs in exchange for hammering out a deal on the structural issues, starting with intellectual property, then the bullish premiums would need to be marked up as this could open the door to a resolution on other major fundamental problems.
Equity bulls and those who believe President Trump would prefer not to have the trade issue unresolved into an election year hoovered up the dip. After all, a possible rollback in a chunk of tariffs should be a monumentally more colossal affair than a delay in the date from mid-November to December.
But, as I mentioned yesterday in my Asia wrap, with delay comes chance that risk-on sentiment has too long to ferment, stalls and then maybe reverses as the waiting game weighs. So deeper profit-taking in equities was not entirely unexpected.
Mind you, on other trade talk cross-asset correlation like oil and yuan, where traders tend to wear trade war emotion on their sleeve, those assets aren't exactly revelling in the afterglow of the rebound in US equity market as significant doubts remain that President Trump will yield to China’s demands for a reverse in US tariffs before signing a deal. While it’s conceivable President Trump wants the political win, it's unclear if he’s keen to bridge the trust gap and commit to a rollback before an enforcement mechanism is in place.
Oil fell after a much larger than expected build in US crude inventories, and reports that the biggest producers in OPEC aren't pushing for deeper oil-supply cuts when the group meets next month.
The extremely bearish to consensus build in the EIA report was flat out bearish as it was lower exports which are contributing to the swell and providing poor global demand optics. The inventory builds and drops in exports is likely related to the COSCO sanctions. The sanctions are coming back to haunt oil bulls as a trifecta of negativity – if you include the probable delay in singing the Phase one trade deal reported by Reuters – hammered any remnant of bullish sentiment into the ground.
It remains unclear if the OPEC meeting planned for December 5-6 will prove to be positive for sentiment. Saudi Arabia has its back against the wall as support for deeper production cuts continues to waver with key OPEC+ members like Russia jostling for position and a more significant tranche of the pie ahead of the December OPEC meeting.
And it's just not that: the quick round trip that oil prices took after the September meeting might be starting to raise doubts about the effectiveness of production cuts.
But perhaps the most negative impression could be that OPEC and OPEC + nations absolutely despise cutting production to actively subsidise shale oil where producers don't fall under any domestic or global supply agreement.
Although lifting off the $1,480 mat, gold is still finding it hard to compete with the jubilance in equity markets and rising US yields. But, for now, the sharp sell off in gold has abated as consolidation mode sets in around the $1,490 level. There’s not a great deal of momentum behind the buys, which suggests defensive positioning rather than any fear of missing out type flows. With the S&P 500 gravitating to the 3075 levels and UST 10-year bond yields above 1.80%, it’s probably challenging for gold investors to form any near-term bullish conviction.
Peak Aussie and Peak Kiwi seem to be setting in.
The short squeeze in NZD/USD looks to have run its course and now focus shifts to the market pricing for the November 12 RBNZ meeting which is now shading towards a full cut. With 17bps currently priced in so if the market continues to price in a full cut, one could expect the market will sell kiwi into that meeting. The stronger Kiwi does suggest the RBNZ will entertain the idea of a 25 bp cut.
The trade talk headlines have weighed on commodity currencies overnight, and while this could be a minor hic-up the US dollar continues to move to the beat of the US 10 year bond and as the market continued to price out US rate cuts further along the curve it’s conceivable that more long Aussie positions get abandoned as investors move back into the US dollar carry and the King US dollar starts to reassert its presence once again.
The delay in the trade talks has caused a bit of hic-up in local currency sentiment as the US dollar, on the back of rising US 10-year yields, remains the bastion of safety whenever a risk wobble occurs.
But taking their lead from the Yuan, local Ringgit traders likely booked profits and halted the rally ahead for the critical 4.13 level.
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In January the Fed needed to put the Taper Genie back in the bottle; now they need to convince the short end crew to back off repricing the Fed Funds strip