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Asia Morning: All Aboard the Rally Bus? Not yet as the HK Bill Could Be a Thorn in the Side of the Market

Market Analysis /
Stephen Innes / 28 Nov 2019

HK Bill signed into law

US President Trump has signed the Hong Kong bill into law; Trump says the measures were enacted in the hope China and HK can settle their differences.

Although we knew this was coming, the market has reacted a bit negatively in a typically low liquidity period which is likely getting exacerbated by the Thanksgiving holiday-thinned trading conditions. 

So, the market is back on Beijing watch to see if this bill could be a trade deal breaker. We can always defer to last week's comments from Chinese Vice Premier Liu He, who said he was "cautiously optimistic" about reaching an initial trade deal with the US., despite knowing of today's specific expectations that US President Trump would sign a bill supporting protestors in Hong Kong. Now the big question is: Does China decide to compartmentalise the HK issues away from the Phase One deal? That's where the risk now lies. 

Gold is +$3.00 as the yellow metal has a tight inverse correlation to trade headlines; WTI is -25 cents and e-minis are off -10 points, suggesting the market is not too bent out of shape just yet. 

But there's a little bit of risk-off around this morning with oil down and gold up again. The markets have proven to be very resilient of late with a tendency for dips to be bought (or gold sold on upticks). So from my seat, it's all about how measured the response is from Beijing, but reversion could be alive and well.  

Undoubtedly China can't ignore that most voters flipped in favor of pro-democracy candidates. Not to mention that Xi must realise that the HK bill might very well be the ONLY issue in the US right now with bipartisan support, which essentially boxes Trump into a corner. 

Connecting the dots might be easy, but waiting for the Beijing headline is not so as traders sit precariously perched atop of this potential trade deal barrier. 


All aboard the rally bus?

Equity markets are stronger in virtually every pocket of the globe and seats on rally buses are filling up by the day after the latest incremental developments on trade negotiations have seen trade talk euphoria run unabated. 

But adding to the risk on appeal was robust US data. Durable goods were healthy in October and there were upside revisions to US GDP amid concerns that the US consumer might stumble in Q4. Indications from October suggest this isn't the case. 

S&P Chart, Source: AxiTrader
S&P Chart, Source: AxiTrader

Treasury yields bounced after the robust US data, while equities continued to grind higher as investors resumed getting stopped into the market. Indeed, equity bears were reminded yet again never to underestimate the purchasing prowess of the US consumer, trade war or not. 

The November Fed Beige Book Survey also projected a tone of stability after many of their business contacts in October's report had lowered their outlooks for growth in the coming 6 to 12 months. In November, more districts reported an expansion relative to last month in manufacturing.  

But, of course, the proof will be in the pudding as November ISM data is scheduled for release on December 2, amid the deluge of data that matters before Christmas is released next week. Assuming a positive follow-through to the latest economic readings, it will be difficult for the macro doom and gloomers to articulate an apocalyptic stance on the US economy.

Financial market confidence is high; the CBOE VIX equity volatility is at a seven-month low, which suggests trade optimism isn't just noise.


Thanksgiving week 

It's typically a tough week to get a solid read on the markets. Still, the renewed equity bid seems to have caught more than a few people by surprise, especially as the consensus was that asset allocation flows would benefit bonds over equities into year-end.

The holiday-shortened week is possibly preventing investors from taking larger bets, fearing that trade talk headline risk is all but a tweet away from upsetting the apple cart. So, if the trade headlines trend favorable and the US economic exceptionalism gets confirmed by next week’s, ISM and NFPs, this rally could have legs to run.

Fundamentals and growth are the main drivers of equities. Still, positioning and liquidity have been vital in 2019 and now it will also depend on what dry powder remains on the sidelines to pace the markets into 2020.

The short covering of bearish bets may continue as bearish institutional investors get stopped into trades amid trade talk optimism.

The fear of missing out on the equity rally has supplanted other concerns as risk-taking is back in fashion. Consequently, rates volatility continues to come off. Fed monetary policy uncertainty continues to dissipate as the market has grown more comfortable with the idea of a Fed on hold for the foreseeable future.

And, at the end of the day, the Fed balance sheet should remain supportive for risk sentiment. 


Oil markets 

Traders hit the pause button overnight after production hit a record high and refinery demand slipped as waning demand-side fundamentals offset optimism that a trade deal was around the corner. That fundamental scrim provided a stark reminder to oil traders that a trade pact, absent a significant rollback in tariffs, might offer up little support to revive oil market demand. 

WTI Chart, Source: AxiTrader
WTI Chart, Source: AxiTrader

But with gasoline inventories running above the five-year high for this time of the year, it not only provides a sharply delineated bearish signal but one that is easily digestible among the numerous price triggering complexities in the oil markets.

Crude stocks rose 1.6Mb – bearish vs. consensus for a 0.4Mb draw and the five-year average of +0.4Mb. It was a smaller build than the +3.6Mb reported by the API. The adjustment figure (the difference between refinery inputs and the demand implied by production, net imports, and inventory changes) has risen to 753kb/d. 

In the bigger picture, this data is unlikely to significantly dent positive oil market sentiment as optimism on US-China trade is still the most critical near-term driver. 

However, what’s potentially harmful to oil prices today is that traders are back on headline alert. And given oil prices’ tight correlation to trade headline risk (good or bad), the market could struggle out of the gates as traders are not in a joyous trade deal frame of mind after Trump signed the HK bill into legislation. 

Oil prices are dealing with a double whammy of negativity at this morning’s open, with weaker demand via the inventory data which is getting exacerbated by trade deal uncertainty. Indeed, there's a lot of trade talk euphoria priced into the oil market so some of that froth is leaking out this morning – albeit in thinly traded markets.


Gold markets

Gold prices buckled on fresh trade optimism, the positive economic data keeping global gold investors on the defensive as their US counterparts take a break to celebrate Thanksgiving dinner. 

XAUUSD Chart, Source: AxiTrader
XAUUSD Chart, Source: AxiTrader

Gold continued to grind lower overnight after recent statements from the White House that an agreement on Phase One of a deal between the two nations was at hand. But the stronger USD on the back of US economic exceptionalism and higher US bond yields provided the most apparent bearish catalysts overnight.

US economic data will likely factor a lot into gold traders’ decision making into year-end as it’s data that will influence the Fed thought process. So, with all the data that matters before Christmas released next week, it could be a telltale week for gold markets.  


Currency markets

The Ringgit

The USDMYR is trading very much correlated to the Yuan as local traders continue to wear trade talk emotions on their sleeve. Again, much of today's focus will be on equity flows and the general run of trade headlines. This morning we're dealing with a bit of risk-off due to Trump singing the HK bill into legislation but the market is biding time, cautiously perched on top of this potential trade deal obstacle.

Read more articles from Stephen Innes: https://www.axitrader.com/int/market-news-blog/stephen-innes

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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