US stocks surged higher Monday, as trade war concerns appear to have decreased, with both China and the US suggesting that solutions to the trade impasse may be forthcoming.
Over the weekend and on Monday, there were productive backroom negotiations to ease trade tensions between the US and China and the markets naturally fed on this positivity. Indeed markets were positioning for an epic equity plunge but instead were left monumentally unwinding equity market shorts. But keep in mind big positive moves in stock markets do start with massive short covering rallies so we could be in for a significant extension.
Mnuchin said, “I’m cautiously hopeful we reach an agreement.” So equity investors do what they have done best this year, and with a great deal of success mind you, jump first, ask later.
But markets have been at the mercy of the trade rumor mills, and with the sparse economic calendar this week they continue to be so but remain bizarrely singularly focused on trade. In fact, even ignoring a good risk aversion signal when over 100 Russian diplomats were expelled from NATO countries after the fallout from the UK poisoning scandal. But perhaps correctly so as the markets have been relishing the fact that there was no swift and potential market establishing trade response from China. Obviously, one road no one wanted to go down.
Oil Markets
Oil traders are catching their breath after last week bullish run. But more significantly, we’re nudging against considerable resistance levels: USD 70 Brent Crude and USD 67 Crude Oil WTI, areas where there’s thought to be a higher propensity for US shale producers to come back online.
While US Baker Hughes rig counts tend to lose influence amidst the waves of heightened geopolitical risk, the rig count numbers are moving ever so close to the 1000 mark, which is raising some concerns over increased production level.
But with the drop in last weeks inventory data, traders were positioning more aggressively premised on sensitivity to geopolitical risk factors, but even despite few bearish signals, and an apparent truce in the trade wars, oil traders are respecting these levels and banking profits while taking some overextended risk off the table.
Gold Markets
Gold prices continue to ratchet higher as the US dollar weakens despite equity markets rebounding on easing concerns about the likelihood of a trade war between China and USA. But realistically there are plenitudes of market turmoil in the making that continue to make gold the go-to place to hedge risk. Middle East tension remains on the boil, and the NATO expulsion of Russian diplomats would typically be an excellent risk-off trade and worth monitoring for a possible escalation
Currency Markets
The dollar is getting whacked with the nasty stick, but hardly surprising as the bar for USD dollar strength remains incredibly low.
The Euro
After being stuck in the mud the past month the break above 1.2400 provided a powerful signal and suggested the markets are looking to get back into riding a possible ECB shift in policy
The Japanese Yen
Opportunity in the making as the USD/JPY should stand the most to gain for USD dollar weakness. However, the street has been unwinding over subscribed short USD/JPY risk hedges which have been dominating flow. Complicating matters is a holiday-shortened week which from a liquidity perspective will throw a bit of a monkey wrench into the works. But tempting to re-engage shorts none the less.
The Malaysian Ringgit
The stars are beginning to align again with the Ringgits fortunes especially with the market under-positioned MYR should see the Ringgit grind towards the 3.87 level
Look for equity and bond inflow to accelerate as risk on takes over the market while buoyant oil prices provide ancillary support.