The U.S. equities markets traded well through the New York morning session but fell well off the pace in the afternoon as Brexit headlines weighed.
The UK PM has won in-principle parliamentary support for his withdrawal agreement, but not on his abridged timetable, adding a degree of uncertainty and leaving his planned October 31 Brexit date looking highly unlikely.
Sterling experienced yet another volatile session as waves of conflicting Brexit headlines poured in and the S&P500 ended down 0.1%, US treasury yields down 3bps to 1.77% and oil up 1.6%.
US Stocks fell as uncertainty over Brexit sank the pound after U.K. Prime Minister Boris Johnson lost a pivotal vote to fast-track legislation. Traders also parsed a flurry of corporate earnings.
Also weighing on the S&P 500 Index was a slide in tech shares outweighed by a rally in energy companies. A sell-off in Facebook Inc. and Netflix Inc. helped push the Nasdaq-100 Index down.
While getting a revised withdrawal agreement to this point, and winning with a convincing margin of 30 votes, is an extraordinary achievement. But with Parliament rejecting PM Johnson’s truncated timetable in favour of more time to debate the bill, it now means members will give the statute the fine-tooth comb treatment, opening it to more criticism and suggesting it could be knocked down later.
Finally, if the EU extension happens the most logical next step for the PM is to propose a motion for a General Election and try to lay the blame for the extension at the feet of the opposition.
Chinese policymakers are facing two challenges revolving around the need to ease policy while defending an implicit CPI ceiling. As such, the central bank is starting to adopt other policy measures, as they did yesterday, by executing an open market operation (OMO). But, overall, yesterday’s OMO suggests that the high CPI inflation prints may continue to constrain just how much more the PBOC can do via RRR or an interest rate cut.
There may be more of a story here than meets the eye. Forget Trade war or Brexit, the real story – and the one that matters most – is China's downshift in growth. With China either unable or unwilling to turn on the monetary policy taps it means weaker everything, everywhere else.
Eventually China’s woes will be the woes of the world, forcing more policy easing globally.
Putting the wobbly China economic landscape in context, it suggests there’s a significant downside risk to regional investor sentiment – even more so in the absence of a sizable policy response for the PBOC.
Oil prices based in yesterday’s Asia session as OPEC compliance was on everyone minds. Then prices ripped higher overnight on news that OPEC and its allies will consider deeper oil output cuts at its December meeting because of a weak 2020 outlook for demand growth.
However, the short-covering rally came to a tentative halt after the API reported a bearish vs consensus oil inventory build of 4.45 million barrels for the week ending October 15.
But with demand fears relentlessly stalking oil markets without miraculously vanishing, it remains questionable if the OPEC inspired move sticks.
After four years of trying and failing to manage oil markets, which have subsidised U.S. oil to the tune of 12.6 million barrels per day – the highest production level the U.S. has ever seen – why would OPEC think this time would be different?
The news that the Bundesbank bought 90,000oz of gold is exciting for gold bulls as the German central bank has not purchased gold for more than 20 years. However, gold remains mired in a tight $1475-1500 trading range, awaiting clarity on both Brexit and US-Sino trade talks.
Gold did get a boost from the failed Brexit vote, but the positive trade developments mostly tempered gains.
Brexit uncertainty is good for gold, but the conciliatory tone struck by China's Vice Foreign Minister Le Yucheng, who said that the trade talks showed progress, continues to undercut gold demand severely. Also, the USD bounced higher after nearly two weeks of broad declines which slightly diminished golds appeal.
Gold remains supported by a gold-friendly Fed rate cut with traders assigning a 91 % probability at next weeks FOMC. This offers support but not a catalyst as it is fully priced in.
But with a divergence between EFT retail flows and the Comex institutional flows, volatility may jump higher if the Comex sell-off intensifies on more positive trade talk news flows.
Over the past four weeks, Gold ETF buying has continued unabated while Comex futures longs have been actively reducing. Spot gold is down ~3% during this time, but what's odd is that Gold ETF flows and spot gold price traditionally moves in lockstep, as supported by 2019 tight correlation.
The latest run of a weaker USD came on the back of an expanding Fed balance sheet, and rising expectations for an October FOMC rate cut. This meshed well with the improving trade talk mood music after official confirmation the U.S. and China are singing from the same song sheet.
The Brexit wobble has left two key currencies, GBP and EUR, precariously perched at the top of the near-term range. The Euro has benefited from the broader weakness in the USD while riding the coattails of the Brexit euphoria.
Brexit risk and the Sterling remains a very cloudy trade while EUR is possibly more vulnerable to any renewed appetite for the USD, especially as we veer to Thursday EU PMIs which could be the ultimate rally stopper for the Euro bulls.
But with the market all-in on the October FOMC rate cut and additional cuts after that – given the great divide on the Fed and whether Chair Powell should cut in October to move into wait and see mode – the USD could surge.
The Malaysian Ringgit
The Ringgit is trading a touch weaker this morning despite positive trade talk rhetoric as the USD traded broadly stronger after PM Johnson’s failure to get Brexit over the finish line.
But the Yuan has failed to make significant gains after its recent rally, and this too could be weighing on local sentiment as the weaker China data counties to dampen the Yuan's appeal.
Also, geopolitical tensions are rising as India’s top vegetable oil body asked members to stop buying Malaysia palm oil amid escalating Malaysia-India tensions over Kashmir. A reduction in Malaysia palm oil exports to India could be interpreted quite contrary to the Ringgit.
Closer to home and away from the all-consuming Brexit headlines, in order to calm the masses who have become increasingly disgruntled with Ms Carrie Lam’s crisis management approach, the Chinese government is drawing up a plan to replace Ms Lam as Hong Kong's Chief Executive with an interim leader. Reports suggest a new leader would be installed by March and remain leader over the remainder of Lam's term (the end of 2022). Not the most creative or ambitious of solutions, but might offer up a temporary band-aid nonetheless.
Read more articles from Stephen Innes: https://www.axitrader.com/int/market-news-blog/stephen-innes.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies