Markets
U.S. stocks erased losses in the afternoon as optimism continues to rise that trade talks may be on the verge of taking a positive turn.
There is no shortage of theories why equity markets are so resilient in the face of so much adversity. However, it may not be any more complicated than the fact global investors appear more than happy to run with the “ risk-on” squeeze on the back of the latest positive short-term developments around the prospect of a high-level Chinese trade delegation going to Washington in October; and anticipation of more central bank easing.
Also, the ouster of "America Everywhere" national security advisor John Bolton has a few tongues wagging this morning. While the move does not immediately signal a more amenable U.S. foreign policy, however, it does eliminate the most vocal advocate for US military-enforced regime change in the Trump administration. So, from a geopolitical risk perspective, it does lessen war risk premiums, especially in Syria, Venezuela, and Iran and opens the door to more friendly discussion with North Korea.
The Risk-Fear positioning index continues to drop, which is not so much about buying risky assets as it is about selling the overbought safe-havens as evidenced by the sharp risk reversal moves on Gold since last Thursday.
The US-China tug of war will continue, but there is growing sense that US-China sentiment may be shifting to a state of trade war neutrality. Where the likely outcome is that China could sweeten the pot by buying more U.S. agricultural products. Not what it will take to get to a full US-China deal, but it is the sort of thing that could be agreed to in exchange for a delay of the Dec. 15 tariffs. President Trump doesn't want those, anyway, especially considering the recent run of weak U.S. manufacturing data which is not the ideal scenario for a run-up into the election year as the U.S. manufacturing sector is absolutely the chunk of the economy the President most wants to safeguard. Overall this would provide excellent optics on both sides of the fence as neither party would lose face. However, importantly for global investors, a Q4 trade war detente would probably mean no lump of coal in the Christmas stocking this year that was so unceremoniously offered up to investors last year.
Oil Markets
The full force of the “Bolton effect” hit oil markets like a ton of brick as Brent crude oil prices fell more than 2% after President Donald Trump announced via Twitter that he’d fired Bolton, a most vocal advocate for U.S. military enforced regime change in the Trump administration. And the most prominent war hawk towards Iran and Venezuela where production has dropped “40% and 48% respectively “during his tenure as national security advisor according to industry data.
However, prices that remained supported on dips by the prospect of stiffing OPEC compliance, soon found their running legs when The American Petroleum Institute reported a large crude oil inventory draw of 7.227 million barrels for the week ending September 5, compared to analyst expectations of 2.6 million barrels. Indeed a considerable inventory draw is always a most welcome way for Asia oil bulls to enter hump day.
Gold Markets
In the wake of the rescheduled trade talks, Gold is showing the first signs of stalling out after a relentless summer long rally.
There is still a lot arguing for higher prices, but the chatter around the gold markets, both physical and futures, is far more balanced than at any time in recent months.
With hard Brexit looking less likely and the markets entering a period of trade war neutrality, the non-stop stream of downward price action suggests a higher propensity to trade Gold from the short side than at in time in the last few months.
There has been much focus on CTA positions this week as replication models are indicating a high level of de-risking unfolding, especially in Gold markets as last week CTA modelling indicated all 12 major strategies long Gold.
Currency Markets
While the pre-ECB housekeeping dominates the EUR/USD, mind you price action feels like we're walking through treacle, and as the bid tone continues USD/JPY on improving risk sentiment flows. Local currency trader will remain vigilant to their daily yuan fixation, which is expected to stay at the epicenter of regional and global currency market risk.
After US Treasury Secretary Mnuchin Monday said China's currency practices would be in focus during the next round of trade talks. The Peoples Bank of China could stick to its modus operandi of keeping the yuan on an even keel ahead of any major international event to avoid any perception of competitive devaluations.
The Malaysian Ringgit
Ahead of the Bank Negara Malaysia policy decision on Thursday, the market is reducing USD longs in the early goings this week. The JPMorgan Asia Dollar Index has rebounded significantly since the start of the month, suggesting that Global investors appetite for the riskier assets is increasing, which is bolstering ASEAN currency markets.
The People's Bank of China effort at tempering the yuan weakness is having a soothing knock-on effect across ASEAN currencies markets.
However, the most significant risk-benefit of a stable yuan is its calming effect of de-escalating trade war hostilities given the U.S. trade administrations focus on all things, yuan.