The U.S. equity markets were a tad weaker Wednesday, and 10-year bond yields fell as the markets were left interpreting the inconsistent news out of the U.S: weak retail headlines for September but upbeat earnings report, with Bank of America reporting growth in investment banking fees.
Despite the Phase 1 trade deal, US-China tensions still smoke in the wake of the U.S. House of Representatives passing legislation in support of the pro-democracy protesters in Hong Kong. A move China's foreign ministry said they would counter with "strong" measures. While this news doesn't precisely provide excellent mood music, it's not being viewed by markets as a US-China deal stopper even if it moves through the U.S. senate uncontested.
Divorce European Style
The Pound is back on the high horse this morning as European leaders ready to gather in Brussels to cement a deal that will set in motion the U.K.'s amicable divorce with the European Union; this could be the 'white smoke' moment where we see the outline of an agreement and can judge the likelihood of domestic ratification.
If an outline of a Brexit deal is announced, the next question is: Can it pass in an 'indicative' (non-binding) vote as early as Saturday? The position of the DUP will be crucial.
Like broader markets, oil did take some succour from the latest positive steam of Brexit news, but prices buckled under the weight of a potentially overstocked U.S. crude markets after the American Petroleum Institute reported a 10.5 million-barrel build in oil stocks which, if confirmed by Thursday's government data, would be most enormous U.S. inventory swell since February 2017.
For oil bulls the report was probably seen as one of those in your face eye-watering data prints, putting them immediately back on the defensive as an enormous U.S. inventory build hits at precisely the wrong moment when markets are overly focused on demand devastation due to the latest run of weaker global economic data.
Brexit headline risk aside, amid the weakening global growth outlook and the copious crude supplies in the world’s largest economy, there’s a suggestion traders may assume a defensive posture in today's Asia session, likely not wanting to overcommit on the downside. Instead, they may wait for more clarity from the more definitive EIA report to confirm the inventory supply deluge while considering a possible sentiment bounce if a Brexit relief rally unfolds.
Still, OPEC Sec-Gen Barkindo’s remarks at an industry conference in India that the producer group intended to maintain market balance beyond 2020 have been regarded as supportive.
Gold markets rose following disappointing September U.S. retail sales data as the data print increased the odds of a Fed rate cut at the end of October. But with that probability already well priced into the fundamental equation, there was little followthrough higher during the rest of the U.S. session.
Treasuries ended higher Wednesday, led by front-end and belly of the curve following weaker-than-expected U.S. September retail sales data. But in a similar fashion to gold markets, gains were pared during U.S. trading as a Brexit deal Thursday appeared possible.
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 – confirmed by the retailer’s sales devastation – does auger well or another 25-basis point easing at the end of this month.
According to my sources at the world’s largest Gold trading banks, markets have been relatively quiet, with considerably less buying than the current average over the previous 2-3 week. Likewise, in the retail space, demand wanes as lower gold appetites might be a result of improving Brexit news flows and phase one of the US-China trade talks.
Today may follow a similar pattern to yesterday: long periods of inactivity punctuated by a sudden burst of trading catching markets off guard. Forex traders may continue to take clues from the fixed income markets and, given that Bunds and Gilts were the focus of attention, it suggests traders will remain heavily vested in E.U. and U.K. headlines around Brexit.
The Euro caught a tailwind from both Brexit news flows and reports that Germany's CDU party may be prepared to consider fiscal stimulus if the economy worsens, this should move the E.U. bond curve steeper and offers support to the Euro. But it also could spur capital inflows into E.U. stock markets as this would also be viewed as supportive for equity markets.
The "Risk on" environment around Brexit and Phase one trade talks continues to buttress USDJPY as traders remain favourably positioned for a possible Brexit bounce in global equity markets.
With the RBA’s move into unchartered territory still clamouring for column inches, the reality of the global "risk-on" environment finally provided a fillip to the Aussie dollar overnight as trader position risk assets accordingly ahead of a possible equity market sentiment bounce around an amicable Brexit divorce.
The Yuan remains a bit of an enigma and, while much ink has been spilt about how and why scepticism might still be warranted, a common theme seems to be that the global economic outlook won't improve even if there's a partial deal.
But what might be essential for currency markets and particularly ASEAN currencies is it's clear we’ve entered a phase of de-escalation, with previously agreed components ambitiously re-tailored to serve both parties’ current interests and most pressing needs providing a suitable background to build on stage 2 and 3 of the agreement, although arguably these steps could be rolled out at a snails pace.
Currently, regional higher yields and quasi high yielders like the Ringgit are now competing for global bond flows in a market where, at times, investors are rushing to sell fixed-income assets at all cost and duration is not the most pressing need. Not the best environment for riskier high yielding debt.
Also, oil prices remain very depressed, although not a huge factor these days for the multi-faceted Malaysian economy, but it doesn't help Ringgit’s optics either.
The local unit was then sideswiped, as was most of Asia, by yesterday’s messy local currency market open after the U.S. House passed the Hong Kong pro-democracy bill which triggered a sell-off in the Yuan. Unfortunately, this negative mood music continues playing in the background.
All of which suggests this current weakness in ASEAN markets has little, if anything, to do with the global growth outlook but instead its a function of ASEAN currency traders who continue to wear headline emotions on their sleeve.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support