Asia Morning: Brexhausted

Market Analysis /
Stephen Innes / 21 Oct 2019


The fact that Sterling has proven surprisingly resilient through the Wellington open on Monday buttresses well for risk sentiment.  

Source: AxiTrader

'Super Saturday' in the UK House of Commons failed to live up to the billing as the crucial 'meaningful vote' on Prime Minister Johnson's Brexit deal was scuttled by an amendment which delays, rather than defeats, the proposed agreement.
There is no Brexit resolution, yet the outlook remains encouraging.

On Saturday the UK government lost a vote on an amendment seeking to force it to request an extension to Article 50 before parliament would consider the Brexit deal Prime Minister Johnson reached with the EU27 last week. Consequently, the government declined to put forward its Withdrawal Agreement for a vote by MPs.
Significantly, however, the votes in the UK's House of Commons look to have tipped in favour of passing the deal cemented last week with the European Union, with estimates suggesting the Prime Minister now has a majority of three to six Members of Parliament to get the deal done. And yet the path to procuring the legislation has become more difficult. The PM will likely have to bring forward the implementation legislation – known as the Withdrawal Agreement Bill or WAB) – and hope it can pass in one piece.

Labour party blockers combined with a deluge of amendments likely to be filed at every step of the process sounds like an arduous process that could test the resolve of that thin majority.
What if MPs decline to back the Withdrawal Agreement legislation this week?  MPs might attach a confirmatory second referendum to the existing agreement, or a general election may take place.

US markets

Equities were weaker Friday, the S&P500 down 0.4% in the US weighted down but losses in Boeing and Johnson & Johnson and European stocks also generally softer.

Source: AxiTrader

Bond yields, however, were little changed with US treasury yields holding in at 1.75%. Weaker data out of China likely weighted down investors on Friday, with GDP growth slowing a touch more than expected in Q3.

But overall the mood music is improving slowly, despite a stubbornly cynical drone in the background. The positive notes this week came from official confirmation that the US and China are singing from the same song sheet as both parties work towards a phase one deal by mid-November.
The latest IMM data showed the beginning of a more significant reversal in risk-off positioning. This can be attributed to two critical emerging narratives: (i) the reduction in Brexit tail risk as no-deal receded quickly, and (ii) the development of a 'multi-phase' US-China resolution which appears to be heading in the right direction.

Together these positive position shifts mesh well with this week’s 10 US bond yields nudging above 1.75%, S&P looking above 3,000 and DXY and ADXY nearing August level, the latter an excellent signal for ASEAN risk markets.

With Fed officials in their pre-FOMC media blackout, investor focus will fall on this week's US economic data calendar which is typically sparse at this time in the month. But, as we bore witness to last week, there’s more than enough headline risk around Brexit and trade talks to keep investors in a permeant state of toggling risk on and off.
The Fed last word into the blackout period
On Friday, before the FOMC blackout period, Fed Vice Chair Clarida said that the Fed will act as appropriate to sustain expansion and that the economy is in the right place with no evidence that the labour market is putting pressure on inflation. He says that inflation remains muted and that global growth estimates continue to be marked down.

So, while a Fed member would never guarantee a rate cut the lack of a more explicit pushback when the market is pricing in two cuts for 2019 could be a telling sign.
Oil markets

Bearish sentiment: Risk premium evaporated as Saudi supply returned rapidly after the terrorist attack – market sentiment remains pessimistic due to weak global economic data. 
Bullish sentiment: Falling U.S. onshore activity and additional OPEC production cuts are important correcting mechanisms, as are the positive US-China trade talks.
Of course, none of this explains why oil prices fell once N.Y. walked in on Friday after both Asia and London oil traders ignored the weaker than expected China data. The sell-off moved slightly beyond the $1 level, where anything below is usually considered random noise by oil traders. So, there must be something behind the move.  
Of course, the prevalence of weak economic data and the ongoing U.S.-China trade dispute have weighed negatively on economic growth expectation, but the move seems a bit more than that.
And while it's always interesting to see oil rise on progressively negative headlines, first the API build and then a bigger-than forecast crude build in the delayed Department of Energy report, it's a bit tricky connecting the dots this morning.

Oil prices likely fell on Friday as Kuwait expects to sign an agreement with Saudi Arabia to restart oil production from the neutral zone along their border within 30 to 45 days, according to a person familiar with the matter.

The neutral zone, which has been shuttered for at least four years, can produce as much as 500,000 barrels a day. Those extra barrels will come to market at a most unwelcome time which may have contributed to Friday’s selling pressures.

Source: AxiTrader

OPEC has flagged the possibility of a further supply cut at its 5/6 December meeting (Reuters, 10 October 2019). The assumption here is if we don't see a material reduction in inventories or a significant rise in prices, there could be another OPEC compliance reduction of 500,000 barrels per day. 

But after what was supposed to be a 6-month compliance period is now moving into year 4 of Saudi Arabia trying and failing to push prices higher, there’s a chance OPEC sits on its hands and rolls the dice, hoping for a rollback on some existing U.S. tariffs on China.

Also, fissures are forming in OPEC as poorer nations desperately need the revenue from pumping more barrels, not to mention that OPEC production cuts are not sitting well with Russia as the cuts basically subsidise US shale production. While the agreement is expected to be rolled over into 2020, there’s no guarantee a deeper production cut is in the offing.

Then again, oil traders were also trying to make sense of the President Trump’s head-scratching comments that the U.S. had control of the Middle East's oil. But should Saudi Arabia be concerned about the US administration position on OIL prices when the US is basically acting as their Middle East bodyguard??

Gold Markets
Gold is opening pretty much unchanged from Friday, despite Brexit headline risk.

Source: AxiTrader

The expectation for weaker economic data and the current level of central bank policy response seems to be all factored into the current price, suggesting Gold traders need a new catalyst. The recent weak data, plus Fed comments and trade risks, are enough to support gold near term but bullion is having a tough time holding all its gains above USD1,495 last week.

After making early gains during the week on the back of Brexit and U.S.-China trade deal jitters, gold dipped into weeks end on signs that fewer central banks around the world might ramp up on another round of easing. Still, the near-term direction for gold always seems to end up focusing on the FOMC forward guidance and what it ultimately means for US bond yields and the US dollar.

The current market thinking is very supportive for gold as trade policy uncertainty continues to sour business sentiment and firms slow their pace of hiring. It’s therefore possible that households begin to experience deteriorating labour market conditions, causing them to pull back on consumption as their expectations dim, all of which points to more Fed easing.

But this does raise the million-dollar question: will monetary stimulus alone be enough to ward off the recessionary Grim Reaper? If the recessionary Grim Reaper comes knocking on the US door, investors may then be thankful they backed the truck up on gold.

Lack of PBOC stimulus dampens investor appetite
Although headlines suggest the market did not think kindly of the weakness in China’s GDP data, last week’s lousy news came on the inflation front as soaring pork prices have pushed CPI inflation to the upper band of the NPC which reduces the scope for the PBOC to cut interest rates over the next six months.


The song remains the same

PBOC Governor Yi Gang toes the party line and said the Yuan is at an “appropriate level” and cross border capital flows have stayed balanced since the currency weakened, while the markets have entered a phase of de-escalation with previously agreed components re-tailored to serve both parties’ current interests and most pressing needs are providing a suitable background to build on stage 2 and 3.

What may now be critical for the Yuan and ASEAN currencies is the outcome of the more significant issues, specifically the December tariff detente, a rollback of some existing tariffs and the Trump administration removing the trade ban on Huawei.

Currency markets
US Dollar

There is an active debate about whether this $60 Billion per month of Fed asset buying is QE or not QE. The Fed insists it is not, but many observers say it is. The dollar can trade very sensitive to shifts in the Fed balance sheet, so this could be a critical inflexion point for current FX sentiment


Source: AxiTrader

The British Pound

Cable opened very resilient in Wellington this morning.

GBPUSD mainly traded 1.2940-50 for most of the New York afternoon and went aggressively bid into the close. This morning Cable began trading at 1.2920-30 so for the most part relatively unchanged; the low so far has been 1.2915. Very few trades went through at the open and even now the market remains very thinly traded. As I issue this note, we are back trading 1.2940-50 suggesting that while there is a mild disappointment, market outlook remains constructive.
The Australian Dollar
The Australian dollar, like all risk betas, did take some assistance from signs that there might be a Brexit resolution over the weekend, so the Australian has opened slightly weaker on the less than super result from UK "Super Saturday", basically taking its cues from the British Pound.
Yet Australian Dollar sentiment should remain bolstered by the calming mood music as the positive tones continue to resonate from the official confirmation that the US and China are singing from the same song sheet as both parties work towards a phase one deal by mid-November.
On the domestic docket there are few, if any, meaningful data releases to guide the Aussie from the domestic front. That leaves the Aussie riding the coattails of Asia's critical trade talk bellwether USDCNH, and when it comes to US-China trade negotiations it's never over until it's over.
But, overall, with the RBA hosing down the prospect of aggressive rate cuts and US-China trade talks moving in a positive direction, sentiment on the Australian dollar remains constructive.


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