The daily 9:15 am Hong Kong USD/CNY fixing has been a significant market driver this week, and so far the markets worst fears have been averted as the Pboc is not allowing the yuanto weaken wantonly, but the markets will continue to probe for a " line in the sand."
But with a probable flow of hot money leaking out of China, the market will be watching for new capital control measures.
If the Pboc allows the Yuan to weaken further, it could trigger a global currency war, something; the Pboc doesn't want which could send the USDNCH to 6.00 or below.
China' holding of US Treasures remain in focus but selling off US treasuries remains the most unlikely retaliatory option given it would weaken the USD dollar.
Finally, it's also unlikely the US will engage the CNH directly in a currency war escalation as the US treasury certainly don't want to fund China Belt n Road initiatives by buying Chinese government bonds
US Markets
The S&P 500 was unchanged up marginally. US treasury yields recovered late in the session to finish a little higher than Tuesday's close at 1.73%, although that is still 28bps lower since end-July, while bond yields throughout Europe and Asia fell sharply so too.
But the New York closing levels belie the torrent of jittery activity that unfolded on Wacky Wednesday as from the New York opening bell recessionary fears seemingly took hold of virtually every pocket of the markets for several scary hours.
Equity markets started paying attention to the rally in fixed income, which is pricing in a rise in US-China tensions and signaling a more prolonged global economic slowdown. Indeed, this round of tariffs matters more for stocks and the US economy than prior announcements as we morph from trade tariffs on some stuff to tariffs on bigger stuff and now to tariffs on all the stuff!
However, calming investors nerves was a timely report from the SCMP that Wei Jianguo, a former vice-minister of commerce, says the September US-China trade meeting is likely to happen as planned. While sources briefed by the US government said video conferences are scheduled to lay the groundwork for the next round of face-to-face talks which might explain the bounce back in risk assets.
While central bank actions Wednesday have underpinned all this as a 'race-to-zero' theme has taken hold of global central bankers.
Frankly, the speed and combativeness of central bank actions should provide enough confidence shock value to risk assets for which it is directly meant to repair to hold things in check.
But is the bond rally the " Shrillest Alarm" yet over the economy or nothing more a reaction function as central banks fight it out to wear the" Yellow Jersey " in the race to zero?
Oil Markets
The counter-seasonal build in the EIA inventory report halting a seven-week downward trend of inventory draws did appear to be the straw that broke the oil markets back. But instead, it triggered a call to action by Saudi Arabia who contacted fellow crude producers to iron out a solution to halt the slide.
Oil prices have clawed back some losses, but the sentiment remains overly bearish. The big question remains will the verbal intervention be enough to stem the tide or will oil traders use this opportunity to increase short positions. With the markets singularly focused on US-China trade situation, it won't take much of negative headlines to send oil bears back on the prowl. Suggesting traders will likely remain short until proof is in the OPEC supply cut pudding.
Gold Markets
A potent cocktail of worrying trade war concerns, falling yields and monetary easing catapulted Gold above the psychological USD1,500/oz level as the day of doves amplified Gold's glittering appeal with the race for the bottom in global yields in stage one.
Early in the New York session Gold raced higher triggered by another steep drop in equities and a slide in bond yields. The yield on the US 10-Year fell to 1.59% at one point, near a three-year low, from 1.73% causing the USD weakened temporarily Adding to the fear of missing out rally comments from the US Administration about unfair Chinese trade deals and from Chicago Fed President Charles Evans that more rate cuts may be needed to stimulate the economy, reinforced the gold rally.
In options, while risk reversals signal that the short-term speculative market is probably the longest it has been at least over the last five years, CFTC data still shows long positioning still has room to increase. Gold should be driven by trade-war news, Fed rate expectations and easing by other global central banks.
The Malaysian Ringgit
A rebound in risk assets, a likely resumption of trade talks and oil prices rebound should ease downward pressure on the Ringgit today.