Asia Morning: The Risk Revival Rocks On

Market Analysis /
Stephen Innes / 22 Oct 2019


Global equity markets were stronger on Monday, S&P up 0.7%, with gains also through Europe and Asia, as the U.S. moves into a busy week of earnings reports. The news flows were comparatively light, but short-term money is getting a whiff of the distinctly positive change in risk sentiment as an air of optimism around trade talks continues to envelop risk markets.

Source: AxiTrader

Unlike previous trade talks where expectations centred on the view that something is better than nothing, this time around there appears to be a tangible and workable roadmap in place which is supported  by official confirmation that the US and China were both on the same page about the intent to work towards Phase 1 of a 'deal' by mid November. President Trump echoed this thought overnight, increasing the probability an agreement will get inked at a meeting next month in Chile.

And the fact that Phase 2 is even being discussed at this time, which contains “actual meat", according to United States Secretary of Commerce, suggests both the US and China may have finally found a bridge that isn't too far.

All of this suggests we should have a positive day in Asian markets.


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Oil prices

After a two-day slide, and despite nascent signs of a definite risk revival, oil prices remain mired, troughing out a base confined to relatively tight ranges.

The Commitment of Traders report indicated a nearly three-fold rise in bearish bets. And while this report includes CTA flows and macro discretionary funds, it’s telling nonetheless that individually a good chunk of speculators don’t think growth prospects for the global economy are going to turn upwards in the short term.

This plays into the argument that a tariff détente doesn’t necessarily mean the global economy gets better, rather the economic bleeding stops. But with trade talks appearing to be moving into the “actual meat” of the matters, it too implies these oil shorts could be vulnerable to any hint of a rollback in existing tariffs.

Source: AxiTrader


Indeed, in other risk-sensitive assets within the latest IMM report, it indicates a significant reversal in risk-off position as risk fear indexes have started to recede with the multi-phase US-China resolution appears to be heading in the right direction, all the while Brexit tail risk occupies a smaller slice of the shrinking risk-off pie. If the reduction in of risk-off bets starts to show tremendous momentum, it could influence oil prices significantly higher.

The early stages of the current risk revival, althoughsupportive for oil prices, don’t provide a significant bullish catalyst in the absence of a rollback in existing tariffs.  

Overall, however, WTI has been range-bound for the last week and, with Oil prices showing signs of basing, it too suggests OPEC compliance remains on trader minds as we veer to the December oil meeting. Even Russia is inching towards full compliance while Alexander Novak reiterates that intention.

Russian agreement is hardly a game-changer from the current supply and demand structure as we’re not talking about a volume of barrels that exceeds compliance targets. But, nonetheless, it’s a vote of confidence for an agreement extension and a possible signal that Russia may be willing to make deeper cuts coming out of the December meeting.

As for the short term, It doesn’t appear any significant technical levels have been broken to usher in more waves of CTA selling, but the poor run of data emanating from some of the world’s largest oil importers in Asia – specifically China, Japan and South Korea – continues to throw a wet blanket on any rallying cry.


Gold Markets

Gold has been trading in a tight $1475-1500 range, awaiting clarity on both Brexit and US-Sino trade talks. And out of the two narratives, US-China trade talks will have the biggest bang for the buck. The improving trade talk landscape may keep gold prices depressed below $1500 and possibly below 1490 near term as trade tension blustery headwinds are offering up little more than a calm breeze these days.

Source: AxiTrader


These shifting trade war winds caused hedge funds and money managers to trim some of their bullish bets in the week to October 15, according to the IMM data, but still remains historically high suggesting positions, especially freshly minted ones, remain vulnerable to positive trade talk news flows which might continue to  undercut gold prices.

Trade tensions have broadly supported gold this year so a trade calm should be expected to lessen that support.


Currency markets

ASEAN currency continue to advance, led by the Korean won, as optimism about US-China trade negotiations reverberates in every capital market pocket across the Asian landscape. Also, the broadly weaker US dollar against G-10 doesn't hurt sentiment either.

The Aussie dollar notched a monthly high before giving way to some profit-taking as trade talk optimism continues to fill the air. In the absence of any significant US economic data to shift the tide, traders turned to the calming trade talk rhetoric from President Trump as progress on the US-Sino talks kept markets toggled to risk-on and high betas like the Australian Dollar continued to benefit. In addition, RBA chief Lowe's comments last week on a return to trend growth didn’t match up with the dovish tone of the October minutes. His remarks suggest the RBA are in no rush to ease quickly.

Source: AxiTrader


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