It was a tough week for the markets leaving many participants battered and bruised, but the great thing about this industry, is we get to do it all over again next week.
US 10-Y yields went on to test 3.0% Friday after a string of constructive US data, and Fed speaks supported the market’s base case for the Fed to continue with gradual hikes through year-end. Beyond there, the Fed’s outlook remains in wait and see mode, but with US 10’s yields making a run higher, the pragmatic view supports the long USD with the AUD offering is the path of least resistance.
No surprise Trump reportedly wants to proceed with the pending tariff list of USD200bn against China amid resuming negotiations. The never-ending ping-pong match around BREXIT continues, and the levels of market frustration are loud.
Welcome new Fed member. Mary Daly, who has been named the head of the San Fran Fed, effective October 1, meaning that Esther George will still cast a vote for the regional Fed in September. Daly was the market’s choice so no risk on the appointment.
ARS continued to struggle, despite the central bank’s non-stop attempts to support it after “The expected disbursement of USD3bn from the International Monetary Fund to Argentina will be delayed until renewed negotiations conclude, according to an Economy Ministry spokesperson.” Could this be a foreshadowing of a negative emerging market lean next week? So, with TRY way to expensive to short, traders could start to look at the weakest links in the chain with IDR and INR the leading candidates to express a bearish EM view.
CNH fell against USD on Trumps China tariff noise despite treasury secretary Mnuchin’s attempts to broker a trade deal with China. But USDCNH, even in the absence of trade war rhetoric, should move higher near term from the most fundamental of views.
USDCNH remains at the epicentre of my USD views, but ECB President Draghi is playing down the risks posed by Italy’s fiscal situation, there is a definite tail risk for the EUR to crater on any Italy escalation. While Italian risk remains at the cappuccino in a coffee cup level, the EURO bears will be ready to seize the opportunity on any EU political wobbles.
But it would be sheer folly not keep an eye on the 1.1730 level which is the August high, and, on a break, we can move much higher. Draghi was much less dovish than most projected, so there is cause for the EURUSD to grind higher.
With USDJPY waking up from what feels like a 2-month slumber the BoJ meeting does take on a higher level of importance than many had expected. Its great having USDJPY back in the fold.
Oil Markets
Brent crude oil tested decent support level on Friday following up on Thursdays bearish shift in near-term sentiment driven primarily on the build in US oil products but trimmed losses into the close. While WTI dips remained supported by the larger-than-expected 5.3 million barrels decline in US inventories.
But perhaps short covering as options on October WTI crude oil will expire on Monday probably influence given the markets lean. But with the risk-reward calculus not signalling a bullish setup for energy in general, in the absence of any supply disruption, the markets could struggle ahead of the OPEC meeting as oil producers were making a convincing argument that a likely downturn in the Global economy could hurt oil demand. Of course, this is from a soothsayer’s perspective. And while impossible to quantify these unknowns, what we do know it that the weaker EM currency profile would most certainly hurt consumers appetite at the tertiary level of the demand curve. But Chinese commodity demand has appeared not to be destroyed by the 25% US tariffs on $34bn as China continues to offset trade headwinds by upping fiscal spend.
In the wake of depleting oil inventories Baker Hughes US Crude Oil Drilling Rig Count hit +7 last week.
Gold Markets
The string of positive US economic data on Friday supporting the markets base case Fed outlook, dented gold's appeal into the close. With US 10’s hitting the psychologically significant 3 % level on Friday, we could see more traders feasting with the gold bears on Monday.