Financial markets consolidated their trade dispute premiums overnights, with U.S. Treasury yields rising slightly and Wall Street's leading indices consolidating at record highs. Markets are rapidly repricing a global economic reset to the pre-trade dispute past as a base-line for the future. Currency markets appear to be playing a belated trade dispute resolution catch-up to the rest of the Street with the dollar rising against developed market currencies and easing against emerging markets ones. It was most apparent in the price action on USD/CNH yesterday.
The dollar’s strength against its G-10 compatriots is hardly surprising and will likely continue into 2020. In a nutshell, U.S. data and U.S. company earnings remain strong, albeit at a reduced pace and the U.S. actually has a yield curve that doesn’t start with 0 or -1.0%, along with a functioning consumer. Contrast any of those factors with most developing markets and it all makes complete sense.
Although much doom and gloom has been proclaimed over the U.S. economy in the past couple of months, due to the trade war and a slowing global economy, the U.S. data just refuses to play ball. Overnight, the ISM Non-Manufacturing PMI rose impressively to 54.7 (53.5 exp). JOLTs Job Openings remained above seven million, and the ISM Non-Manufacturing New Orders and ISM Non-Manufacturing Employment sub-indices both impressively outperformed.
My concern though is that are we approaching peak optimism? Oil is sending warning signals on this front. OPEC downgraded its market share for the next five years overnight in the face of a flood of U.S. shale oil. The U.S. API Crude Inventory overnight swung from a drop of 708,000 barrels last week to a massive 4.26 million surplus on last nights data. OPEC+ will almost certainly have to confront the reality that further production cuts will be needed to hold up prices at their December meeting. So oil prices quite reasonably would have been expected to fall overnight; wrong. In fact, oil rose overnight, with the words trade optimism ringing in traders ears.
China’s price for President Xi travelling to somewhere in the U.S. farming belt to sign an interim trade deal appears to have increased as well: tariffs removed on $360 billion of Chinese imports according to media sources, i.e. most of them. That will be a bitter pill for President Trump to swallow, and we know that he doesn’t do bitter very well when it’s dished up to him as opposed to vice-versa. Another keyword is “interim.” An interim deal benefits both sides in the near-term but kicks the much more complicated discussions, and the reason the whole trade war started, down the road for another day.
In a nutshell, a vast amount of optimism built into financial markets over the past two weeks. One-way trades with every man and his dog on-board them, usually don’t end well. Markets ignoring physical reality for conceptual optimism or negativity because it suits their narrative is another. There are plenty of banana skins that could slip up the story. One being a freshly emboldened China negotiating stance, the second being a somewhat belligerent and erratic U.S. President. The flux capacitors may be ready to send us back to the future, but markets should be wary of overcharging them and short-circuiting them.
That we are not out of the woods has been highlighted by the mixed data from Asia this morning. New Zealand unemployment rose although wages increases hit a 10-year high. Japan’s Jibun Bank Services PMI fell unexpectedly to 49.7, and the Philippine’s Balance of Trade fell to a worse than expected $-3.119 billion. Worryingly, imports collapsed by 10.50%. Things may be getting better, but regional Asia is not out of the woods yet.
Indonesian Retail Sales will be released today and is expected to show an increase of 2.2%. There is plenty of room for disappointment here though in South East Asia’s largest economy, with cautious consumers, political uncertainty and GDP growth stubbornly capped at 5.0%.
German Factory Orders are released this morning, along with the Thailand rate decision. The former is forecast to show a modest recovery to zero per cent. The latter will be a close-run thing, but the Bank of Thailand will probably follow Bank Negara Malaysia’s lead and hold rates at 1.50%; preferring to keep its powder dry and see how the trade dispute plays out this month.
Equities
Wall Street consolidated its gains overnight after a strong rally over the last week. The pause for breath saw the S&P 500 fall 0.12%, the NASDAQ finish unchanged, and the Dow Jones rise 0.11%. Nevertheless, all three indices remain at or very near, record highs on trade deal expectations.Wall Street’s pause for breath has flowed through to Asian markets with no data from China today to stir things up.
Asian indices are mostly flat with only the Hang Seng falling 0.35%. Down under, the Australian ASX 200 is flat also, but New Zealand’s NZX 50 has declined 0.90% post this morning’s rise in unemployment.
A day of consolidation beckons for both Asia and early Europe ahead of Germany’s Factory Orders data.
Currencies
The FX market appears to be showing signs of life with trade optimism spurring a rise in the dollar against developed market currencies whiles the dollar is falling gently against regional Asian currencies. The development is hardly surprising as a partial trade dispute resolution should add fuel to the U.S. economy and regional Asian ones.
EUR/USD fell 0.50% to 1.0780, USD/JPY rose 0.55% to 109.10, USD/CHF rose 0.50% to 0.9910 and NZD/USD fell 0.40% to 0.6375. The AUD was unchanged at 0.6895, balanced between a stronger greenback and trade hopes spurring Australian growth with its high beta to Asia.
The USD/CNH has been steadily falling over the last week from 7.1000 and yesterday broke 7.0000. There followed a sharp spike to the early August lows around 6.9850 before an equally violent rally back to 7.0050. The price action had a definite stop-loss selling look about it once 7.0000 cracked.
The PBOC has set today’s USD/CNY mid-rate higher at 7.0080, reflecting the overnight dollar strength. USD/CNH has continued to fall through, lower by 100 points to 6.9950 so far. Clearly, trade hopes are the primary driver here and the rally in CNH this morning will likely lead other regional currencies to strengthen against the dollar in today’s session.
Oil
A bearish OPEC future demand and market share forecast, and much higher U.S. API Crude Inventory data couldn’t dent oil’s rally overnight. Crude appears to be focused entirely on the positive effects of an interim trade deal on demand to the exclusion of all other factors. This is a dangerous mindset and almost always ends in tears. It should also be a warning sign that trade optimism is starting to cloud reality or that its benefits are becoming overstated, and thus, overpriced.
Brent crude rose 1.37 % to $63.30 overnight but has dropped 0.60% to $62.75 in early Asia trading. WTI spot rose 1.20% to $57.20 a barrel but has also fallen this morning, slipping 0.56% to $56.890.
This morning’s price action suggests that Asia is being more circumspect about oil and is concerned that bearish news was ignored entirely overnight. Traders appear to be lightening longs after a mighty three-day rally, as the level of downside headline risk in oil has increased exponentially at these levels.
Gold
Gold collapsed to the bottom of its medium-term range overnight as the U.S. dollar surged and investors continued rotating out of haven trades on trade deal hope. Gold fell 1.73% to $1483.50 an ounce having tested and held, critical monthly support at $1480.00.
The continuation of the risk-on trade deal optimism will be crucial to gold’s now. The charts themselves suggest a break lower is the more likely route. But over the last month, gold has looked bid at $1520.00 and offered at $1480.00, only to whipsaw traders and disappoint. Therefore, some caution is warranted at getting too bearish down here.
Should gold finally break the $1480.00 region convincingly, we may see some long position liquidation. The next support is at $1460.00 and then $1440.00. However, traders may wish to await a daily close below $1480.00 before climbing on-board.