The direction of travel has turned further south on trade mostly driven by the lack of positive headlines after comments from US President Trump on Tuesday. With poor figures from both Australia in China, Asia risk has traded with a heavy tone throughout most of the session.
Japanese Yen
It looks like there is more room for negativity to extend for the yen. Still, I wouldn't be too surprised if it all ends up in another range play session, knowing that we are little more than a positive headline away from wiping the slate clean of any trade talk harmful residue. Key support remains 108.50
RBA rate cut fever
Australian employment slumped to -19k m/m (Mkt: 15k), the worst since Aug-16. This miss has predictably triggered a case of RBA rate cut fever as the drop-in employment is crying out for more policy stimulus.
However, the MYEFO seems unlikely to provide material fiscal stimulus. Therefore, the market is starting to price in a 50 bps in cuts by mid-2020. Not unexpectedly, with the double dose of negative from China and domestic data, the Aussie is trading off the back foot.
Burst the trade optimism bubble
It doesn't take much to burst the trade optimism bubble, which should remind us just how fragile sentiment is. I’m amazed just how quickly the bears are trying to seize the opportunity to tell all that we could easily be in the same lather rinse repeat trade war cycle that has been in place since 2018; after all, the long-running trade war has met many snags and dead ends along the way. And while good news on trade front has likely lulled the market into complacency ("Trump needs a political win!") but come on folks, it's a bit early to start up with long live the long-term cold trade war mantra.The trade talk narrative has turned uncertain after the hawkish talk from Trump on tariffs, both versus Europe and China, in case a deal is not reached, which has smacked hard against elevated levels of trade optimism.Hong Kong escalation is also weighing on sentiment with authorities expected to announce a curfew for the weekend. And now even data is not helping; Chinese IP, retail sales, and investment all disappointed overnight, Japanese Q3 GDP as well. All of which is suggesting the US-China trade war continues to have a fatal effect on Asia growth sentiment.
Gold is the hedge against negative trade outcomes
All of which is causing the duration to bounce in yet another case of positive trade risk sentiment taking the stairs up but the elevator down when things turn sour. Which has bolstered support for haven assets like gold, which remains the primary go-to defensive strategy against escalating trade frictions as the potential for only a limited US-China deal without tariffs being rolled back increases
Oil market
Oil prices benefited from a surprise draw in US crude inventories and comments from OPEC Secretary-General Mohammed Barkindo that US shale production growth in 2020 may fall below expectations. The EIA made a significant upward revision yesterday to its short-term US production forecasts, although this did not appear to impact prices negatively. The API reported a surprise crude draw of 541kb; the EIA reports inventories later today with consensus for crude +1.6mb, gasoline -1.2mb, distillates -1.0mb, and refinery utilization +110bps.
But this week's inventory data might play second or third fiddle as price movements are primarily following sentiment on the outlook for the OPEC+ agreement and US-China trade. And in the absence of good news on trade talks, the negative price skew may remain in check.