The markets were dancing to a more positive beat overnight as equities, oil and yields all found a place in investor’s hearts amidst increased optimism around the Italy-EU budget impasse and upcoming Xi/ Trump trade summit.
However, the US-China meeting is more than just about trade, it’s about spanning the vast cultural divide and therein lies a significant opportunity to begin to mend ideological difference between the world's leading free economy and the world's best example of state-directed capitalism while making positive strides over global security. It’s a huge deal and why it's so extremely important both sides get it right! Let’s hope the markets don’t end up with a case of misplaced optimism.
Of course, President Trump wants to keep China between a rock and a hard tweet after he echoed his advisor’s hawkish tariff views when during an interview with WSJ he stated, ‘highly unlikely’ that US would hold off on the increase to 25% on USD200 billion of goods.”
The markets veered mildly negative to the headline, but this is familiar Trump tune traders have become all too accustomed.
Oil Markets
Oil markets will remain in focus this week.
Oil prices staged a relief rally overnight as the great bottoming out debate sets in after chatter and speculation picked up that a global rebalancing agreement to cut output will come out of a sideline meeting between Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin at this weeks G-20.
But as OPEC’s next balancing act unfolds it will be tough to defeat the bearish markets forces in play while delivering a production cut with enough sting without provoking the ire of President Trump.
We’re at a very tricky phase in this OPEC cycle which makes anchoring oneself to any level difficult as a plethora of options remains on the table which is providing structureless price discovery. While I usually view an overnight $2.00 price recovery in oil as a significant move, but when it comes after a $4.00 dive, it suggests the markets are not out of the woods by any stretch of the imagination.
Gold markets
Improved risk sentiment and a stronger US dollar took some lustre of gold appeal overnight. But what remains essential for gold prices this week is Fedspeak and correctly do the Feds pivot to a definitive pause in 2019.
Currency markets
There will be intense scrutiny on the Fed message this week after last week’s material policy pivot in the Fed narrative, In early 2018 the Fed identified specific economic fair winds including domestic fiscal stimulus, too loose monetary policy and a stronger foreign growth input which caused a repricing higher in the Fed 2019 rate hike trajectory. However, last week the Fed in a coordinated fashion walked back some of the more hawkish elements around global growth and domestic fiscal stimulus. This week’s Fedspeak, namely Powell, Williams and Clarida’s speeches, should help clear up some debate around the Fed baseline expectations.
The Euro
Even though Italy spreads narrowed the Euro was dogged by a very unimpressive IFO echoing what the advanced Eurozone PMI’s told us on Friday – the momentum in the Eurozone economy is sputtering. Undoubtedly the ECB will get jittery about the uneven Eurozone economic recovery while plummeting oil prices certainly don’t help on the headline inflation front.
ECB President Draghi statement before the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament didn’t precisely topple the apple cart, but coming on the back of the soft data prints, traders became rattled when Draghi suggested “The data that have become available since my last visit in September have been somewhat weaker than expected.” But by all accounts, the soft data does suggest the ECB will tread lightly which could lead the Euro to struggle into year end.
Japanese Yen
It seems the only 24 hours cycles when the USD/JPY moves over 40-50 pips are when traders have the wrong position. While the market was not overly short USDJPY, there was a lean to the downside after last weeks risk-off events. So, when risk asset recovered yesterday, and US yields move higher, layered stops were triggered taking the market to 113.70. But checking around the market messengers this morning, positions appear light given the risk events this week in G-20 and OPEC headline noise.
The Malaysian Ringgit
Global risk sentiment has improved overnight while oil prices are trying to put in a base. Both factors are favourable for the beleaguered Ringgit. Also, the relative calm in the RMB complex is helping regional sentiment.