US equities were stronger on Monday, the S&P500 up 0.6% and setting a fresh record high at the close. Rising optimism for a phase one US trade deal with China, robust earnings and the anticipation of a Fed interest rate cut, continues to breathe new life into investor sentiment.
The S&P 500 was off to the races, taking out its July record highwater mark after President Trump indicated the US is ahead of schedule to sign a trade deal.
The anticipation of a trade deal and soaring expectations of further monetary stimulus from the Fed was the perfect tonic and provided just the right fizz to power equity markets higher.
Although this week’s deluge of tier one economic data will provide great candy for analysts and economists, traders will always try to anticipate future events rather than react to current ones. None of the data will change the Fed's mind about a rate cut this week. And the data will be stale by the next meeting. So, other than perhaps the ISM and whether it will confirm the bounce seen in the Markit manufacturing data, all focus is squarely on the FOMC forward guidance.
Even though the tier one economic indicators look bad and continue to weaken, if they don't decline as quickly as they used to, for many speculators this might also be a signal to buy.
The Pound stabilised after the European Union granted the UK a formal extension to the Brexit deadline until January 31. So, in place of Hallowexit comes a 'Flextension': the new period is January 31, but the UK can leave sooner if Parliament ratifies the withdrawal agreement.
RBA Governor Lowe will give the Sir Leslie Melville Lecture in Canberra at 5:45 pm Sydney time today. His speech is entitled: "Some Echoes of Melville". Leslie Melville was a crucial figure in the development of central banking in Australia and this lecture has been an annual event since 2002, though traders are not expecting anything policy significant to be divulged. Still, this speech comes on the cusp of the November Board meeting so, given the RBA's very open communication strategy this year, traders will be watching it closely.
Oil prices fell on Monday as bulging supply risk weighed. Running contrary to a frothy risk appetite supported by optimism around the US-China trade deal, oil markets tumbled after data provider Genscape reported that inventories at the key Cushing WTI storage hub swelled by 1.5 million barrels per day.
Oil traders immediately reverted to their favourite pastime of stalking sluggish demand amid expanding inventories.
But the increase likely caught more than a few traders by surprise as the decline in drilling activity – as evidenced by the fall in US rig counts – was expected to contract inventories this week and a short-term position revaluation unfolded.
One would assume that the falls in the US Oil rig counts would eventually factor into the US supply equation. So perhaps it's just a matter of time before it does suggest this dip could remain supported around both trade optimism and the eventuality that US inventories will print a series for draws.
Gold tumbled overnight as trade talk optimism weighed.
Fed rate cut or not, Gold pricing above $ 1500 was no match for a record-setting day on the S&P 500 and even more damning for the Gold markets is the effervescent stock markets’ sentiment spread to fixed-income markets. US 10-year treasury yields rose a further 5bps to 1.84% and, having turned briefly negative in August, the US 2s10s curve is now at its steepest since end-July. Higher US yields greatly diminish Gold’s opportunity costs.
Surging equity markets and soaring US bond yields are absolutely the worst flatmates for Gold.
FX Volatility continues to fall, and in a sign of the times the markets are at the lowest gap pricing for the Fed meeting across G10 FX at just 29bp.
A further reduction of risk aversion trades due to receding tail risk around Brexit and US-China trade tension powered USDJPY above 109 overnight.
The Pound and Euro have stabilised higher after the EU27 extension eliminated the risk of a no-deal Brexit.
Not surprisingly, the positive US- China phase one trade signals have not triggered an all aboard the Yuan rally bus. Given China's weak economic outlook in the absence of a rollback of existing tariffs (the crucial precondition for a test of 7 USDCNH) traders may be inclined to hang on to their long USD bias against the Yuan. Many analysts are still expecting an eventual test of 7.20-7.30 as China's economy continues to struggle along with the thought that when the US and China get down to the meat of the matter around IP and technology transfer grievances, trade talks could go incredibly sideways.
The Ringgit continues to trade stable, supported by calming trade talk rhetoric and anticipation of a Fed rate cut. But appetite is not exactly overflowing as regional economies are expected to suffer the knock-on effect from a slowing Chinese economy.
While phase one trade deal is good for sentiment, traders remain sceptical about any removal of existing tariffs which is critical to turn the economic tide in Asia. And without the withdrawal a simple tariff detente suggests things might not get worse, but doesn't necessarily mean macroeconomic conditions improve.
Read more articles from Stephen Innes: https://www.axitrader.com/int/market-news-blog/stephen-innes.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies