US equities were stronger on Thursday, supported again by better earnings as the S&P 500 now sits within 1% of an all-time high.
Treasuries ended Thursday cheaper but off session lows as market focus remained firmly on a potential Brexit deal and US-China trade talks.
For the time being, in a case of bad news is good, investors continued looking through the weaker run of US economic data which included softer than expected housing starts and industrial production. Instead, they remain encouraged by the better than expected earnings results and the more amenable tone from US-China trade talks.
It was an erratic 24 hours for the Pound, to say the least, and focus now shifts to the Parliamentary “indicative vote” on Saturday. What’s critical from the market perspective is that possibly the most contentious channels to a no-deal Brexit have now mainly been blocked off.
Oil rose 1.1%, even as Turkey agreed to a ceasefire in its incursion into Northern Syria.
Oil turned positive after a U.S. government report showed significant declines in fuel inventories, outweighing a bigger than expected crude build.
And while the huge draws on gasoline are very supportive, the short-term volatile nature of the inventory data may only provide a temporary band-aid as worries about where global oil demand will pan out for the rest of 2020 ultimately set in again. Given the latest dreary run of economic data, this skew may continue to thwart any of the market’s bullish ambitions.
Still, the US-China news flow remains very friendly, especially after China's Commerce Ministry inferred trade talks were entering the phase 2 level which raises the spectre of a December tariff détente and even a possible rollback in some existing tariffs.
A meaningful de-escalation in US-China trade frictions would help alleviate some of the markets’ most bearish concerns and, at a minimum, it could ease the blusteriest headwinds.
Gold markets have been somewhat muted as short-term gold traders are apparently not in the mood to get overrun by the latest deluge of headline risk that’s seen geopolitical tailwinds now shift to possible headwinds for gold markets.
Indeed, price action suggests there has been considerably less buying than has occurred over the previous 2-3 weeks.
While disappointing US economic data offers support to gold prices, an October Fed interest rate cut isalready factored into the current price of gold, so the weaker data is not providing a fresh catalyst for gold bulls.
But showing signs of trading more like a commodity again, gold was likely supported by the falling dollar which is getting weighed down by weaker US economic data and confirmation of a Brexit deal which is helping the Pound and the Euro sentiment.
Gold traders may continue to critique their positions against U.S. bond yields while looking for policy clues from Fed speak —most importantly Vice Chair Clarida who will have the last word before the Fed's blackout period begins when he speaks on Friday about the economic and monetary policy outlook.
Mind you, the deterioration in forward-looking sentiment data does auger well for another 25-basis point easing at the end of this month.
USDCNH bottomed out overnight at 7.0675 on Brexit news, in addition to positive China trade news. The market was likely starting to position for a China backtrack of phase one. So, it was an about-face for the Yuan bears after China's Commerce Ministry inferred trade talks were entering the phase 2 level which seemed to evaporate a lot pent up trade talk scepticism as the key ASEAN risk bellwether RMB rallied.
USDCNY was fixed at 7.0789 yesterday so Yuan traders logically bought the dips below 7.050. Now the market pivots to China GDP data where we could be in for yet another mainland economic wobble.
There were several stops getting triggered USDSGD throughout the Yuan run as it appears the markets were positioned for the USDSGD to go "screaming" through 1.4000 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 providing a suitable background to build on stage 2 and 3.
What may now be critical for 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.
Now is not the time to use the cloudy crystal ball excuse: these are the moments traders should relish and excel!
The Australian Dollar
Yesterday’s better than expected domestic jobs data provided significant relief for the Australian Dollar and has started to push out the timing of future RBA rate cuts gradually.
In addition, weaker US economic data, specifically the drop-in manufacturing output, provided poor US dollar optics while offering up a fresh confirmation of weakness in the US economy.
Also, like broader markets and especially higher risk betas, the Australian dollar did take some succour from signs that there might be a Brexit resolution while getting an added boost from more trade talk calming rhetoric from the China Commerce Ministry.
The improving global risk environment, a slowing in the global bond sell-off and sings of life in the local equity market are providing a fillip for the Ringgit. Also, the more amenable tone being sounded by both the US and China could provide the Ringgit more headroom to rally.
But, for the time being, the Yuan will continue to steer the ASEAN currency boat, as the RMB sentiment will continue to offer up the best barometer for US-China trade sentiment.
Currently, everything in ASEAN FX remains relatively rangebound. But in the absence of negative China trade headlines, the market might be content to continue selling into USD rallies, which seems to be the typical flavour across most of G-10 as we end the week.
Read more market views from Team AxiTrader: https://www.axitrader.com/int/market-news-blog/.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies