I suspect the truth lies somewhere in the middle.
Markets continue to struggle with the headline ping pong around the US-China trade talk commitment. There was both good and bad news last week; Huawei's temporary license got extended, China has reportedly invited US negotiators to Beijing for further talks, while angry words were interchanged over the passage of the HKHRDA bill in the US Congress, and China is believed to be pushing for tariffs to be rolled back to pre-May levels.
Traders are increasingly fatigued by headlines and now appear unwilling to chase either direction.
On the critical trade talk bellwether, USDCNH, the latest Reuters positioning survey indicator shows positions close to flat, as the market is not keen to add to tentative USD shorts from earlier in the month. In addition, the PBoC has kept a very neutral bias on daily fixings after a more pronounced downside bias in October.
But one thing that became clear last week and will most likely extend this week is there's a distinct wary tone impacting most cross-asset markets as traders repeatedly fade trade headlines, both good and bad. The bid side narrative remains in check, supported by trade optimism and positive US data, but the limited top side equity market bounces suggest stocks and risk may be running on fumes.
While bonds appear entrenched to the lower-for-longer narrative, a reflationary nudge in equities once again gives way to defensive strategies. The market might need confirmation of a trade deal venue and a growth rebound to make headway so, assuming the market base case for a December US tariff walkdown remains a safe bet – and failing a tariff rollback headline – the next series of US economic data points might be critical for risk.
This week's holiday-shortened US economic calendar is jammed with important releases: consumer confidence on Tuesday then preliminary Q3 real GDP, October durable goods orders, October personal income/spending and the November Chicago PMI on Wednesday.
While the bar for further Fed policy action is very high for the remainder of 2019, it would be wise not to fall into a complacency trap as any significant shift in critical economic data variables could trigger a "material reassessment" that Fed Chair Powell and other policymakers have repeatedly cited as the bar for further policy actions.
However, markets could be a bit of a jumble, as they tend to be on Thanksgiving week, as traders have a propensity to flatten books ahead of US holidays. This is typically also the time of year when traders start to think about year-end bonuses, so they’re looking to defend profits and only trade on sure bets – at least as confident as bets can be in a market fraught with trade talk headline peril.
But ultimately this week the market will be on "China watch”, waiting to measure Beijing's response to the Hong Kong bill President Trump is expected to sign into law. But the fact China's Vice Premier He did extend an olive branch on trade talks, despite the contentious escalation unfolding around the HK bill, suggests that, on some level, China may be willing to compartmentalize it away from the broader trade negotiations. But the proof will be in the pudding.
Oil may continue its roller-coaster ride again this week, with sentiment forever changing on news flow relating to US-China trade talks.
Brent traded back above $63 per barrel on Friday following a Chinese invitation to US trade negotiators for further discussions in Beijing. But prices crested and then fell on trade talk concerns as HK Bill doubts surfaced when the China Global Times Editor-in-Chief criticized President Trump's comments regarding Hong Kong: "President Trump told Fox if it weren’t for him, thousands of people would’ve been killed in HK and HK would have been obliterated in 14 minutes. I don’t think it’s something a president should boast of. And I don’t think there should be people who like to hear such hot air.” This headline likely exacerbated the weekend profit-taking ritual, which was probably on the cards after oil prices made a stellar run last week on talk of OPEC compliance extension.
Still, the trifecta of positivity, US-Sino trade talk optimism, OPEC + compliance, and a sturdy US macro data scrim, should continue to resonate.
This could be a crucial week for oil markets. Traders will be looking for any positive signs that the much discussed face-to-face between the US and China will take place before December 15, when the US is scheduled to impose more tariffs. Given the heightened level of uncertainty and possible trade deal delay until 2020, traders got a case of itchy fingers heading in the weekend and pared-back some risk.
If they’re able to schedule face-to-face talks, the market may take that to imply that China is ready to do a deal and that, at the very least, December 15th tariffs may be postponed and discussions can get back on track for a Phase One deal. However, as we approach December, if we haven't heard anything of these talks being scheduled the probability will steadily increase that December 15th tariffs will be put in place and Phase One talks have more meaningfully derailed.
On the supply side, OPEC+ is signaling that it’s likely to extend existing oil output cuts when they meet in Vienna on December 5.
On the geopolitical front, tensions increased in the Middle East, sparked by Yemen's Houthi rebels saying they shot down a spy drone near the border with Saudi Arabia.
Sentiment took a hit earlier last week on concerns that US support for pro-democracy protests in Hong Kong would derail talks. Still, for the moment, it appears China is placing more emphasis on resolving the trade situation as opposed to torpedoing the trade talks due to the US Hong Kong bipartisan bill.
Looking ahead to the OPEC meeting in December, Russia's Deputy Finance Minister has said deeper OPEC+ cuts would be a negative for Russia, and this has thrown some element of doubt into the equation again. Still, the market may be willing to look through the Russian commentary, believing it to be little more than posturing. I suspect Russia will ultimately fall into line with Saudi Arabia on an agreement extension accompanied by stricter compliance of the existing agreement.
Nigeria (+300 kb/d) and Iraq (+160 kb/d) are currently producing above their quota, even after reductions in October, effectively freeloading other members’ compliance. Members can reasonably demand Nigeria and Iraq are first brought into line with their earlier commitments while keeping their forward bias open for deeper cuts if needed.
To set my own views straight, risks remain around both trade and the imminent OPEC decision, but the latest evidence suggests expectations are more favorable for oil prices on both variables.
The US dollar
The takeaway from the US data so far this month is that the FOMC is correct to pause. The walkback in some dovish thinking post FOMC minutes, coupled with financial markets entering a hedging phase ahead of the flurry of risks in early December, has a mild bid for the dollar starting to emerge, especially against the ASEAN basket. But I don't think the market is willing to spend a lot of premium, despite vols at fresh lows.
On the Euro, there are some hedges building around German SPD elections, ECB President Christine Lagarde's first meeting, while there remains some buying of Euro for the UK general election as a cheaper proxy than the GBP.
Friday weak UK PMI triggered the move lower in GBP, which was likely exacerbated by an unwinding of long positioning heft related to the general election. The latest YouGov opinion poll gives the Conservatives a healthy lead at the headline level, which reflects the consensus view in FX positioning. But the real question for the long nervous nellies is whether Labour squeezes Lib Dem voters back on side. So, while Friday's move on the Pound was anything but politics related it could be soon enough, even on a subtle polling shift in Lib Dem and pro-Remain voters.
It's difficult for most FX traders to have a clear view, so are perusing EBS volumes which executes the lion’s share of USDJPY. Still, it suggests traders are preferring to stay on the sidelines while only getting involved at the extreme edges, towards 108-109. USDJPY remains supported ahead of 108.00, with sellers in place above 109.00. For the bullish risk-takers, the bid on dip mentality remains intact, but even on that those so inclined would be playing it tight to the chest.
QQQ/EEM ratio vs. the DXY
As suggested last Thursday, it's hard to ignore the fact that US equities have started to beat the world indices again, and substantially, which brings the US exceptionalism QQQ/EEM ratio vs. the DXY back into play. And may I suggest it’s that time again to look at the bullish USD side of the equation, which could prove to be gold's eventual undoing in December.
The Malaysian Ringgit
Coming off a depressing week for the Ringgit and the rest of the ASEAN basket, traders will be looking for any positive signs that the much discussed face-to-face between the US and China will take place before December 15, when the US is scheduled to impose more tariffs.
Given the heightened level of uncertainty and possible trade deal delay until 2020, traders have been more inclined to pare back bullish bets and turn more neutral on ASEAN currency risk. Because of these elevated risks in general, global investors may be more prone to hedge ASEAN currency exposure into 2020 (like G-10), suggesting a bid on dip mentality will prevail in the absence of any positive trade development. This week could be critical in shaping views into 2020 as the closer we get to December, and no face-to-face date or venue has been selected for the US-China trade talks, the higher the probability for local risk assets to wobble and the Ringgit to weaken.
US economic data will likely factor a lot into gold traders’ decision-making processes, as will the level of Beijing retaliation to the HK bill – if they do retaliate, that is. Gold continues to trade below its critical technical 100-day and 50-day moving averages, struggling to make any top side progress. The market is in an extended period of consolidation at the bottom of the recent range, waiting for the next major catalyst to emerge. But, ultimately, it's all about Fed policy, US interest rates and the US Dollar, which remain the essential variables as far as the real gold market is concerned.
Gold continues to track US-Sino trade developments as, in the absence of fresh catalysts, traders are merely reacting to the latest trade headline. And while gold continues to be a critical defensive strategy against escalating US-China trade friction, without a dovish impulse from the Fed or a significant equity market sell-off, price action might be capped in the near term.
Gold was pressured lower Friday on signs from the US Manufacturing PMI numbers that the worst might be over in that sector. Manufacturers registered a substantial rise in new orders that was the sharpest since April, with goods producers signaling a further recovery from the slowdown seen earlier in the year. At the same time, both manufacturers and service providers indicated a rise in workforce numbers. The overall increase in employment followed two successive months of payroll cuts.
Bitcoin got slammed after the PBoC launched a new crackdown on cryptocurrencies, echoing similar concerns other global central bankers have and warning of the inherent risk of issuing or even trading them. It was only a month ago that Bitcoin holders were reveling in the afterglow of China's blockchain embrace, which was thought to include cryptocurrencies in that hug. What we’re possibly witnessing is a bit of a reality check that perhaps while President Xi embraces the blockchain technology, he may not be so eager to put his seal of approval on the coins themselves, like his global counterparts.
Read more articles from Stephen Innes: https://www.axitrader.com/int/market-news-blog/stephen-innes.
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