It was a shaky day for US equities yesterday, but the broader indexes did manage to claw back from the depths of despair, though they still ended the day slightly lower. This only 24 hours after the most substantial gains in 6 months, reminding us just how fragile investor confidence is.
Risk aversion continues to permeat across global markets. While oil prices were leaking everywhere (blame inventories), industrial metals also traded on a soft note. While there isn’t one reason, there’s still a sense of foreboding in the air, concerns that the next US equity correction could be the "big one.”
President has gone postal
But I’m looking no further than the US president ratcheting up the rhetoric by "going postal” on China. Indeed US-China tensions are back on the radar, particularly with NYT suggesting Trump’s next target will be China’s cheap postage services. But the headlines aren’t much better in Europe which is intensifying investor jitters. There is zero expectation for a Brexit divorce agreement coming out of the EU Summit while Italy's budget is widely expected to be rejected by the EU. Late NY headlines from Reuters say that EU leaders are dropping plans to hold a November 17-18 summit for now – they are ready to meet again “if and when” the EU’s chief negotiation reports that decisive progress has been made in negotiations. An amicable Brexit divorce has certainly taken another significant hit.
US Dollar
The US dollar rallied Wednesday, reflecting two forces: unwind of the prior two sessions of US weakness as USD haven flow picked up, and FOMC minutes which confirmed the Feds would continue to normalize rates for the foreseeable future. This was the tail risk going into the minutes, as some market participants thought the FOMC would walk back some of the market's more hawkish interpretations of Jay Powell's comments post rate hike presser.
US Treasury FX Report
Though released a little later than expected, the US Treasury’s semi-annual report on currencies was mainly in line with what was leaked to the press late last week: once again, no trading partner was named a currency manipulator. Moreover, the same countries – China, Japan, Korea, India, Germany, and Switzerland – were on the Treasury’s monitoring list.
Though China was not explicitly named this time, this report, however materially, escalated its language against China – in four significant ways.
- The executive summary focuses on China’s history of unfair trade practices
- China had their section while everyone else was grouped into another
- The Treasury will review the RMB in 6 months
- But the one major caveat is, and it's something the markets were suspecting all along, “as a further measure, this Administration will add and retain on the Monitoring List any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act.”
The report comes out in line with market expectations and gives the markets another six months of breathing room. Hopefully, US-China can make some headway on the trade front. But giving China their section in the report suggests that the US Administration is ready for a more punitive response China should discussions between Trump and Xi fail to yield results at next month's G20.
I guess we can breathe, at least for now, a temporary sigh of relief as we await the president who no doubt will chime in on the US Treasury findings.
Oil Markets
A sizable shocker into this week's more definitive EIA Weekly Petroleum Status Report which has sent Oil markets spiraling lower amidst some concerning developments for oil bulls.
The DOE data for last week significantly more bearish than Tuesday’s American Petroleum Institute report, with crude stocks increasing 6.5 million barrels per day. This is particularly dispiriting on two fronts: (1) markets had positioned for last week's bumper inventory report to retrace (2) API on Tuesday suggested we would see a draw.
However, petroleum prices were testing the downside in London and early New York before the inventory data even after a Tuesday report from the American Petroleum Institute. The de-escalation in US-Saudi tension suggested the market was very prone to a downside correction on any inventory build.
So, for today at least it could be a case of how low prices will go rather than how high. But given the Iran sanctions and uncertainty around the spare capacity debate, $80 Brent should provide solid support, but oil bulls have considerably less breathing room than they had yesterday.
Gold Markets
The US dollar refuses to stay down for the count which saw gold prices fall to the bottom of recent ranges. But the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst still make gold's appeal a favorable tail hedge against these escalations. Despite the FOMC minutes cementing the Fed's rate hike view, the US midterm elections do pose a significant headwind for both the USD and US equity markets. As such, gold should remain a favorable hedge over the short term
Currency Markets
Nothing else matters but the RMB
Chinese authorities are a lot more sensitive about the RMB on a trade-weighted basis rather than on a bilateral basis against the United States, and with the markets trading at the bottom end of the CFETS basket range, there will be more focus on the basket after two specifically odd fixes towards the end of last week. So, the debate rages if last week is a signal for a shift in policy. If authorities decide to let this CFETS level go, it will open a massive can of worms that should see USDCNH rocket higher and will have a positive knock-on effect for the USD.
Regardless of which direction the USDCNH moves the RMB will remain at the epicentre of currency markets and will drive the near-term direction of the dollar. So, for local ASEAN currencies, I suspect they too will be held hostage to the RMB moves.