It looks like President Trump is bowing to bipartisan pressure as he’s expected to sign the Hong Kong bill into law, according to the latest headlines.
Sentiment remains exceptionally cautious amid heightened trade uncertainty around this latest event, potentially complicating the US-China trade outlook.
The headline saw the S&P500 initially breach 3100 as investors continue to protect profits by taking equity chips off the table as a degree of pessimism sets in. But I do wonder just how engaged with markets investors are amid all this headline table tennis. While investors remain tuned in, they could soon be dropping out. After all, once the algorithms have moved markets on headlines, there’s very little juice left unless you are content to play the risky game of mean reversions.
The question now is whether it's possible to compartmentalize the Hong Kong Bill away from the Phase One deal or make the US offer bigger sweeteners – as the President suggested earlier, "We're looking at whether Apple should be exempt from China tariffs.” Or will the trade deal morph into something greater than initially thought?
US equities were weaker Wednesday on a resurfacing of trade tensions as the Hong Kong Bill found itself in the middle of US-China trade tensions. And, for what it's worth, the Phase One trade deal between the US and China may not be completed before the end of the year. It could "slide into next year," according to Reuters, which cited trade experts and people close to the White House. The report said China wants more extensive rollbacks of the existing tariffs, and the US is making its additional demands.
Then for good measure, shortly afterward, White House Deputy Press Secretary Judd Deere said, "Negotiations are continuing, and progress is being made on the text of the Phase One agreement," according to Fox News.
US ten-year treasury yields retraced another 5bps, taking returns down to 1.73% on the back of a convexity driven bid as the broader market sells-off on a flurry of futures volumes after the Reuters report.
In this environment the technical picture takes on added importance, especially given the dominance of CTA in the market. The belief on the street is that the CTAs are now short so that a fixed income rally could be a pain trade for them. And with discretionary accounts heading for the sidelines ahead of year-end, the CTAs could be a significant influence on the market. So, even fundamental purists like myself are looking at all the squiggly lines on the chart for no other reason than others are doing the same.
The FOMC statement
The positive outlook, muted inflation pressures and downside risks all remained the ongoing narrative in the FOMC minutes. There was nothing in the details to change the idea that the Feds would react to downside pressures and not stray too far from the rate cut lever but, for now, the Fed is on pause, all else being equal.
The market remains far too complacent about risks heading into year-end. I suspect this is because an equity rally suits most people and that the current high gloss veneer is covering up many a market imperfection.
It was a solid session for oil markets with WTI currently up as much as 3%. Earlier on Wednesday, the EIA reported that overall Crude stocks rose 1.4Mb, about in line with consensus for a 1.5Mb but a significantly smaller build than the 6Mb build reported by the API. However, the market latched on to the fact inventories at Cushing fell 2.3 Mb barrels, the most significant drop in three months.
The inventory build was lower than last week's as refinery inputs rose significantly and net imports slipped as a result of the Keystone pipeline outage factoring into a bullish report.
But unless global growth recovers more than expected, top side aspirations merely come down to the US-China trade deal. More precisely, a trade deal would allow held back big business investment decisions to move forward and possibly turn around the faltering momentum in Indian oil import demand, which could soak up a large portion of the supply glut.
USD/Asia has been better bid following news around the Hong Kong bill as the market awaits the specificity around an expected retaliation by China if Trump signs the bill into law. This is likely, so we could see this long Asia currency position squeeze continue.
The Ringgit has fallen as the regional basket is caught on the same boat as local traders are opting on the side of caution, although it would be a real stretch to describe price action as risk-off with the S&P500 gravitating back above 3100 and USDJPY stabilizing around 108.50.
So, while traders gradually pare back Asia currency risk, they’re not turning entirely negative as, to a degree, they still see the US-China trade deal inching forward. Honestly, from yesterday's negative headline hype you would have expected falls of at least 2% in Asian markets. That was just not the case.
As far as local ASEAN currency appeal in this malaise, with a bid under gold, from a cross-regional currency perspective, factoring the Gold-THB correlation and Thailand's substantial foreign exchange reserves, it suggests the Thai Baht will continue to feature as the regional haven umbrella.
Gold remains sensitive to trade and subject to changes in trade sentiment, notably US-Sino negotiations. FOMC statement appears neutral to negative for gold prices short term, but geopolitical issues look supportive over the longer time. However, the gold markets have all but drawn a straight-line vector between a trade deal and the price of gold.
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