Not out of the weeds yet

Not out of the weeds yet

After yet another Monday morning equity meltdown in Asia and an equally poor showing across global equity markets. President Trump’s lieutenants Mnuchin & Navarro issued an unequivocal denial the  US is considering investment restriction on China.  US equity markets have subsequently bounced off session lows were the S&P was down as much -2% at maximum bearish mode to close ~1.3- 1.4 % on the day. Despite the rebound, there remains a considerable degree of scepticism as investors are still no less confident if this is a case of diplomatic doublespeak or a meaningful denial. And keep in mind, we expect to hear about in more details the real Trump administration’s actions taken under Section 301 to respond to China’s alleged theft of US intellectual property which likely means more headaches for investors later in the week and by no means are we out of the weeds just yet. The abundance of mixed and no less confusing signals are causing massive consternations across all asset classes.

Oil Market

Overshadowing oil markets on Monday was a cloud of uncertainty post-OPEC not to mention the web of confusion regarding President Trump’s trade policy.

But at the heart of the matter traders are trying to digest the fact that while OPEC will add more supplies back to the market US inventories will run tight on the prospect of  North American supply outages.

As highlighted yesterday, a report that a 350,000 bpd Canadian oil sands upgrader could be offline for the next month, which should lead to increased shortages in the North American supply and deplete vital inventory supplies in Cushing. The anticipated shortfall should be supportive of the U.S. benchmark prices all the while narrowing WTI’s discount to Brent.

Besides declining US commercial inventories, OPEC is adding international supplies back to the market which is naturally weighing on Brent prices and narrowing the spread.

Gold Market

There continues to be less safe-haven demand for Gold as the US dollar continues to be the significant driver behind Gold prices. But with confusing signals on the dollar index that slid back from last weeks highs, while CNH which is plumbing the 2016 depths after the Pboc announced an RRR cut, we’re getting bombed with mixed currency signals across the board.

But with confusion on the dollar front and ongoing chaos in equity markets gold should continue to find a bid at the lower end of the current ranges. But market speculators remain sellers on any rallies to 1275 until further notice as the hawkish Fed has all but taken the wind out of Gold bulls sails.

But it’s hard to ignore this escalating trade war rhetoric and if it does blow up the ensuing equity market purge will undoubtedly attract haven gold demand. And while the dollar currently remains the go-to hedge into US bonds, I suspect longer-term investors will start to look at this gold dip in a favourable light and begin gingerly buying ahead of the US mid-term elections which should add another level of political uncertainty in the US markets. Also, as we approach the significant US refunding periods with an unprecedented amount of bonds coming to markets in August and September, it difficult to see how the dollar will be a winner in this case even more so if trade war drags on and China becomes a lukewarm buyer of the US’s new issues.

Asia Currency Market

Not too unexpectedly $Asia is trading higher in sympathy with the Yuan weakness. While the RRR cut was not that unexpected, the market is starting to read into more aggressive policy shift from the Pock and covering RMB currency risk. As such, the market should remain firmly in buy the dip mode.

The USDKRW is trading off yesterdays highs as the KOSPI held up reasonably well while dealers are respecting month end exporter flow. But today is another day with the Kospi struggling to find traction suggesting some currency pain in the offing.

The much-maligned Ringgit didn’t are so well and getting little support from foreign interest, and with local markets under tremendous stress from capital outflow and the prospect of escalating trade war, indeed the path of least resistance appears higher with the next key focus on 4.05 USDMYR.

G-10 Currency Market

EUR: Despite persistent global and domestic headwinds the Germany Ifo expectations index for June was stable at 98.6 vs the 98.0 expected and continues to support the EUR as dealers continue to trade singularly focused on economic data this week.

JPY: The USDJPY has found some legs overnight, but I’m not convincingly inspired with as risk aversion abounds limiting upside test of 110 where trader remain better sellers.

EM-Currency Market

TRY: Savage price action on bond and swaps markets as traders start to price in a sooner rather than later policy easing has seen the USDTRY reverse all the post-election relief rally and some. Again, the TRY is establishing itself as one of the weakest links in the EM chain and we should expect more pain with little gain.