Asia Morning: Rational Optimism Wanes

Market Analysis /
Stephen Innes / 25 Oct 2019

Another busy day in the markets with a plethora of earnings-related dislocations dusted with a little bit of macro noise (PMI's, Pence speech), all of which is creating a bit of choppiness and keeping everybody's eyes peeled.



A sense of rational optimism around Brexit has given way to more uncertainty as the Pound, and U.K. risk markets, roiled on news that U.K. Prime Minister Boris Johnson will seek a general election on December 12, possibly setting up what amounts to be a national referendum vote on his Brexit strategy. Of course, nothing ever comes easy in the incredibly muddled U.K. political landscape as the main opposition Labour Party Leader Jeremy Corbyn said he wouldn't agree to the call for an early election until a no-deal Brexit is ruled out.





U.S. Vice President Mike Pence criticized China's actions against protesters in Hong Kong. Of course, the markets would have revelled if the hawkish human rights diatribe were kept to a minimum but, to perpetuate his role as the bad cop to President Trump’s good cop, VP Pence didn’t play nice. If there is any watering down around vital aspects of the speech, it was the calling for greater engagement between the world's two biggest economies.
But the real catalyst for rising US-China risk is the Senate vote of the Hong Kong Bill, which is expected to pass. China has already said it will retaliate once the bill is passed.
In the past, however, the U.S. and China have isolated issues from the broader tariff negotiation, Huawei for example. While the Hong Kong issue is exponentially larger than Huawei until more clarity unfolds, the issue could be compartmentalised away from trade talks and put on the growing laundry list of U.S. grievances against China.
Oil Markets

The surprise draw in U.S. crude inventories continues to resonate. Demand concerns still weigh, but with indications that the U.S. and China are making progress in tariff discussions, sentiment continues to turn more favourable.

Also, prices were supported as U.S. business activity lifted from recent lows when the U.S. October flash manufacturing PMI came in higher than expected.
Despite the weaker German PMI data yesterday, an unexpected supply outage at the North Sea Forties pipeline facility buttressed prices.
There’s an excellent argument to be made that the recent inventory draw comes at a seasonally opportunistic time during the refinery overhaul period. In addition, with U.S. production thought to have plateaued at 12.6 million barrels and with the Oil rig count dropping, suggesting production level could fall, this too buttresses well for more inventory draws soon.

Oil bulls will feel even more reassured that OPEC may discuss the possibility of deeper production cuts at the group's December meeting and sentiment has remained alive on that narrative, despite a denial by Russia's Energy Minister.
By the numbers, if OPEC enforces full compliance within the existing agreement that would suggest 300-400 thousand barrels per day of additional cuts from merely enforcing the agreement. If another 500 thousand barrels per day cuts are agreed to, next year's oversupply concerns could be a moot point.



Gold Markets
Gold moved back above US$1,500/oz amid Fed rate cut expectations and elevated geopolitical risks. Uncertainty breeds anxiety and gold markets love market anxiety.


Gold prices were buoyed by escalating geopolitical risks, including Brexit and VP Pence’s hawkish China overtones.

A sense of rational optimism around Brexit has given way to more uncertainty around PM Johnson’s Brexit strategy.

U.S. Vice President Mike Pence criticized China's actions against protesters in Hong Kong triggered heightened uncertainty around US-China trade talks.

What’s not uncertain, however…

A Fed rate cut is extremely gold friendly, and prices could knee-jerk higher if a cut happens.

Although the ECB left rates unchanged, Draghi's legacy looks to carry on. Given the lack of any significant fiscal expansion in Europe, this suggests the ECB’s relaxed policy stance will be there forever and ever. And if things do turn worse, there’s scope to ramp up QE. So, central bank policy continues to lend support to Gold.


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