Asia Morning: From Short Strokes to Broad Strokes

Market Analysis /
Stephen Innes / 20 Nov 2019

US Markets

The market opened stable in New York on Tuesday morning before sliding back into risk-off mode as investors remain gripped by shifting trade headlines. In the absence of a credible and comprehensive trade deal roadmap, investors might think optimism around Phase One has peaked and turned more defensive to protect profits by taking chips off the table. While investors may be willing to look through the headline ping pong, but the missing roadmap they most certainly are not.

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

Trust remains a considerable problem and there’s still little clarity on how that trust gap might be bridged, especially given China has made it abundantly clear that removing existing additional tariffs is a precondition for reaching a deal. Until that gap has been bridged, and the US administration agreed to a rollback – or at minimum provides a road map as to how that might be achievable – those threating trade talk pessimism clouds will continue to linger.
China has demanded that the latest round of tariffs, presumably since May, be lifted and for a graduated walkdown of legacy tariffs imposed prior. Absent these preconditions, there is no deal.

US Senate passes the Hong Kong Bill

In a massive win for the US administration’s China hardliners, the US Senate on Tuesday passed a bill that could lead to diplomatic action or previously unthinkable economic sanctions against Hong Kong, likely sending the legislation to President Donald Trump to sign into law.
Does the Hong Kong bill threaten to upset the trade talk apple cart?
Complacency is one of the things that makes me nervous about the situation in Hong Kong. Investors remain relatively sanguine about potential equity market toxic developments, both domestically and from the US as Hang Seng vols remain low.
However, President Trump has been conspicuous by his silence when it comes to the Hong Kong escalation. Perhaps Trump sees a trade deal with Beijing as a more significant priority as he makes his case for re-election and doesn't want the Hong Kong bill to act as a stumbling block. But now that the "HK bill" has passed by an overwhelming majority in the Senate, it will be difficult for the White House to hold out against this bipartisan pressure, which could to put another snag in the trade talk lines. 
Non-trade talk drivers
US equities spent most of the session in the red as, despite resilience in household spending evident in recent data, retail earnings reports weighed on sentiment. 
NY Fed President Williams said the risk to the US economy remains tilted to the downside but also reiterated the US economy is "right where we would like it to be." But with trade talk limbo setting in, investors were more predisposed to focus on the “tilted to the downside" part.
The highlight in the day ahead will be the FOMC minutes for October, where investors will be looking for hints around how deep the committee divisions on the October cut were, and what’s meant by a material reassessment.

Oil Markets

Oil prices collapsed on a toxic elixir of oversupply fears and trade talk pessimism.
The market’s worst-case supply fears came to fruition after the API reported a more massive crude build than expected. The API estimate came in bearish (+5.954 million barrels) to consensus (+1.5 million barrels), offering no reprieve to the latest trade talk hemorrhage. 

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

But it's the US-Sino trade negotiations that continue to move the markets. On that front, a credible and comprehensive trade deal, one that leads to better growth outcomes, is looking increasingly unlikely at this stage. And even if a limited Phase One deal gets tabled, one which included no tariff rollbacks, the existing tariffs should continue to work their way into the data, creating an even bigger economic air-pocket, further weighing on global growth.
On the other significant mood setter, the December OPEC meeting. Russia is back playing hardball, suggesting they have little interest in cutting production, although they could extend existing curbs to support Saudi Arabia, Reuters reported. Oh dear…

Waking up to this trifecta of negativity this morning suggests that, other than the expected profit taking from Asia short-sellers, oil prices might be hard-pressed to make any top side ambition absent a significant shift in trade talk sentiment.

Currency Markets

Short term speculators were very quiet overnight ahead of the FOMC statement, which might ignite some fast money action. In contrast, the long game players are either happy with their positions or content to sit on the sidelines and see how the next few weeks play out in terms of a US-China trade deal and the UK election. 
Yuan's sentiment has taken another turn for the worse. The US Senate unanimously passed the Hong Kong bill, which might open a whole new can of worms as President Trump might have to defer to his party wishes and sign the bill into law which will, of course, trigger some type of retaliation from Beijing. Traders hate uncertainty and are predictably reducing some Yuan risk.

USDCNH Chart, Source: AxiTrader
USDCNH Chart, Source: AxiTrader

The Malaysian Ringgit 
The Ringgit is trading with a weaker bias, coat-tailing the Yuan as uncertainty over the US-China trade deal and the Hong Kong bill is clouding ASEAN currency optimism. Also, political unease has ratcheted higher after Malaysia's ruling party Pakatan Harapan suffered an election setback, losing a seat in the vital by-election in Tanjung Piai. Indeed, this should provide a bit of a wake-up call to government leaders. 
The Philippine Peso 
As with other ASEAN currencies, the Peso is falling prey to headline risk around the ebb and flow of the US-China trade talks. But the Peso has remained in favor despite the fact the central bank has cut interest rates three times this year. But this is a market that cares less about interest rate differentials and more about growth and geopolitical concerns, and on that front the Peso remains in favor. But with so much sentiment tied into a positive trade talk outcome, bullish bets are paring back risk as a comprehensive US-China deal is looking less likely this week. Still, from a regional perspective, given the significant drop in domestic inflation the Peso seems attractive from a real yield perspective.  
Besides, the domestic growth recovery continues to resonate as GDP is expected to accelerate. Still, the fly in the ointment is an escalation of the US-China trade war that continues to linger ominously.

Gold Markets 

Gold is stabilizing a bit after the position unwound in the past few weeks on the back of better market sentiment towards a US-China trade deal.
The market remains speculatively bid on dips on the thought that China might not be that optimistic on a trade deal.
US 10-year bond yields slipped below 1.80% overnight, improving gold market sentiment – as does uncertainty around possible China repercussions from the Hong Kong bill passing through the US senate.
XAUUSD support is at 1455 and 1445; resistance comes in at 1475 and 1490. 

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

Gold Weekly: Is There Further to Run, or Should Investors Cut and Run?

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