Asia Morning: Trade Talk Toing and Froing

Market Analysis /
Stephen Innes / 02 Dec 2019

US equities dropped from record highs following the Thanksgiving holiday, with the S&P 500 posting its most significant decline in seven weeks. All major industrials fell, led by energy and consumer staples. US treasury yields gained 1pt to 1.78% and oil fell precipitously ahead of this week’s OPEC meeting. 

In APAC, a China-led equity market sell-off concluded a busy week that was interspersed by index rebalances and monthly futures expiry.

Indices, both local and global, struggled into week’s end on a combination of Trump’s signing of the HK Bill, which dimmed optimism over a near term trade agreement, year-end profit-taking, and increased demand for downside protection. The trade talk narrative is expected to dominate risk sentiment again this week. But with only a mild push back for Beijing, the market base case scenario of peak tariffs (no new US tariffs) remains intact, question marks continue to sit atop the tariff rollback concerns.

USDCNH Chart, Source: AxiTrader
USDCNH Chart, Source: AxiTrader


Over the weekend, China PMI data was released. The factory activity indexes unexpectedly rebounded in November for the first time in seven months, indicating that China’s efforts to insulate themselves from the global economic downswing are working. And while the basing of these critical forward-looking industrial gauges is encouraging and supportive for growth, the outcome from the toing and froing trade talk narrative will be the primary swing factor for global risk markets this week.


Oil Markets

All eyes are on OPEC this week. 

At the open, prices remain supported by the surprisingly resilient China factory activity with the forward-looking PMIs beating expectation. There were also some suggestions from the Iraq oil minister, contrary to the run of current news flow, that OPEC and allies would consider cutting supply further, by about 400,000 barrels a day to 1.6m. Both headlines have likely contributed to some profit-taking from legacy short positions.

Welcome to the typical topsy turvy OPEC meeting week of ever-changing news flows. 

The OPEC/OPEC+ producers meet in Vienna on December 5-6 and while it looked like the group would maintain the status quo and extend the current 1.2Mb/d cut, even that narrative has been thrown into question. 

Oil prices had been holding up well despite concerns that this week’s OPEC meeting may be awkward. Then WTI prices fell on the Reuters OPEC survey which indicated OPEC production falling further to 29.57mm bpd in November, down 110k bpd from October. This puts compliance with pledged cuts up to 152%, from 135% in October. Generally, a stricter compliance commitment would have been perceived as good news for the oil market but the extraordinarily high level of compliance appears to be fueling market speculation that OPEC could reduce output cuts at the December 5 meeting. But, at a minimum, it also suggests the production agreement at the current level of cuts is not working amid waning global trade which is causing demand devastation. One look at Korea's gloomy export numbers provides damaging evidence for all to see.


WTI Chart, Source: AxiTrader
WTI Chart, Source: AxiTrader


With risk markets struggling amid diminishing trade talk optimism, the latest OPEC compliance survey undercut the market’s base case expectation that OPEC was, at the very least, likely to extend the current level of cuts. As such, prices fell precipitously on Friday.

ARAMCO stock market debuts this week and Saudi Arabia has a huge challenge trying to reign in the cartel to buoy global oil prices before the $25bn stock market debut of its state-owned oil giant. But they seem to be making some progress, at least on the verbal intervention front. 

On Sunday, Iraq’s oil minister, Thamer Ghadhban, told reporters in Baghdad that OPEC and allies outside the cartel would consider cutting supply further, by about 400,000 barrels a day to 1.6m. While this headline might provide some initial price support it might not be a huge swing factor since Russia at this time seems set against, in favor of stricter compliance. 

While the extension of the agreement with greater respect could start to balance the oil market in 2020, prices may remain under pressure due to a faster ramp-up of Norway’s Johan Sverdrup field and rising US shale production.

At these perceived higher levels of production, oil prices will be even more sensitive to US-China trade headlines and US economic data released this week. 


Gold Markets

US economic data will likely factor into the gold trader’s decision-making process as this week’s data calendar could very well impact the tone of the December 11 FOMC meeting. And, of course, the market will continue to react to US-China trade development. 

On Friday, gold recovered from recent weakness and moved higher in very thin trading, with much of the US still on Thanksgiving holiday. There was a steady stream of buying throughout Asia, European and abridged US trading sessions as the market turned focus to the dimming optimism over a near-term trade agreement. Prices were also nudged higher by simmering geopolitical tensions in North Korea and the Middle East.

The gold market will likely pay close attention to this week’s US economic data, where gold’s best chance to rally above $1,475 will probably come from the devil in the data’s details.

However, trade twists and turns may yet be supportive for gold.


XAUUSD Chart, Source: AxiTrader
XAUUSD Chart, Source: AxiTrader



Currency markets 

Volatility continues to compress and this week should be no exception, given the widespread view among ECB and FED watchers that monetary policy has reached the end of the road. But this extremely low volatility is creating a very fragile state of currency view neutrality and one which a run of weaker US economic data could unravel quickly. 

So, this week’s US data docket may take on some importance for the currency markets as the Fed could tilt towards more cuts, andsoon, if the data turns weaker, particularly on the employment side. At least that’s how the market could read it.

In the absence of a macro catalyst, currency traders appear unwilling to step up their game into year-end.


The Euro

The pair spent most of the week between 1.1000 and 1.1010, and the EURUSD had its smallest trading range (40 pips) since the single currency’s inception. This type of range-bound market suggests G-10 traders will continue to do little more than trade the extreme edges. 

EURUSD Chart, Source: AxiTrader
EURUSD Chart, Source: AxiTrader

Support - 1.0990 / 1.0970 / 1.0950

Resistance - 1.1030 / 1.1050 / 1.1090


In Asia EM, the market still expects some progress on the US-China.

The Yuan 

The narrative on the US-China Phase One deal shifted at the beginning of November from ‘detente’ to being about real potential ‘de-escalation’ centered around a rollback in tariffs.

USDCNH Chart, Source: AxiTrader
USDCNH Chart, Source: AxiTrader

Peak Yuan’s negativity at the start of September (7.20) has considerably receded. The current 7.03 represents fair value by suggesting the market is pricing in the thought that peak tariffs have been reached and assigning a 25% probability that the Phase One deal rolls back on the last tariff increase from September 1 – 15% on $ 111 billion – will occur.

Support – 7.02/7.00/6.95

Resistance – 7.05/7.075/7.10

So, on confirmation of a September tariff rollback, we could see the short-lived move below 7.0 that occurred in early November, when rollbacks entered the bullish Yuan equation, turn into a more lasting expression. And the Yuan moves should also provide some clarity on how other crucial trade talk assets like gold and oil will perform.


The Malaysian Ringgit

A similar narrative is unfolding in the ringgit and other ASEAN currencies as what’s driving the Yuan sentiment, which in no small degree ASEAN currency markets, remain held hostage to the trade talk narrative. 

Over the weekend, Prime Minister Mahathir appeared to suggest Malaysia will look at ways to prop up the ringgit due to higher import prices which are weighing on consumer cost for necessities. But with the economy struggling at its weakest pace in a year amid falling exports, a stronger ringgit doesn’t lend support to the critical export sector. 

On the surface, it’s encouraging to see the government offering up support for the beleaguered ringgit. Unfortunately, it still likely comes down to external (trade war detente) rather than internal policy factors that will lend support for the ringgit. 

Support – 7.15/7.12/7.10

Resistance – 7.05/7.075/7.10


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The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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