Risk off continues to seep through markets as traders scramble to revise both inflation and US growth forecast in the wake of a tepid CPI and PPI prints while February’s dreary US retail sales deliver more disappointment to the markets.
The sagging USD and the fear of an escalating trade war with China have global markets on edge with investors taking a defensive posture moving from buying on dips to the more careful preservation of cash strategy. According to Investment Company Institute (ICI), US fund investors withdrew billions from domestic stocks during the equity market’s tariff tantrum.
The “Rexit” to Pompeo transition continues to cast a dark cloud over the markets as investors are preparing for more market-alarming, protectionist headlines. The US is determined to reduce China’s bilateral trade surplus by 100 billion, but things are about to get very messy as reports continue to circulate that the Trump administration is ready to levy US tariffs on China imports targeting intellectual property which could come as early as this week.
All the usual go-to haven trades have been on the move, JPY is eyeing 106, EUR has found a bid while gold remains firmly supported on dips.
However, adding to the US dollar downdrafts, US yields are looking very tired approaching the significant support around. 2.80 in 10 Year US Treasuries. If the level gives it could spring a trap door type of reaction on the USD.
Despite yesterday’s robust Chinese data as industrial production and fixed asset investment surged, concern about the tariffs plagued mainland and Hong Kong equity sentiment which is unlikely to abate short term given trade war escalation is looking more likely than ever.
Reports are circulating that You’re Fired Episode #36 The Sessions Saga is about to air. However, this should not surprise as the air is rife with stories that more high profile departures are yet to come. Topping the betting boards are Ivanka and Jared Kushner, and White House Chief of Staff John Kelly.
Oil Markets
A bit of a topsy-turvy overnight session as prices initially plummeted after The US Energy Information Administration reported that crude supplies rose by 5 million barrels for the week ended March 9 doubling analysts’ expectations. Nevertheless, after taking a standing eight count, prices recovered thanks to the gasoline-thirsty US consumer as gas warehouses dropped 6.3 million barrels, and diesel inventories declined by 4.4 million barrels well more than market forecasts.
However, the Shale Oil machine is showing little signs of slowing, and with OPEC now conceding that non-OPEC oil supply, spearheaded by US shale producers, will outpace global oil demand growth in 2018, it would suggest that the path of least resistance remains lower despite this afternoon short covering rally.
Gold Markets
Gold markets have taken a break during the NY session as price action has turned a very neutral and not surprisingly so with traders in wait and see mode during this Fed blackout period ahead of the March FOMC. During these lulls in price action, the market tends to be more driven by technical rather than fundamentals. After moving to the critical trend line resistance level of $1,330 and failing to push through, the short term fast money traders were quick to take profit.
With the US dollar still holding within near-term ranges and USD/JPY appearing extremely sticky above 106.00, gold bulls will need some help from a more defined USD negative bias to break above trendline resistance. Nevertheless, when considering the negative overtones in global equity markets, drops in gold prices should prove short-lived.
Currency Markets
The Euro
Topside momentum was chilled thanks to ECB President Draghi who sounded the caution alarm at the ECB and its Watchers Conference. Again emphasizing that inflation was the most critical factor and that there was no rush to remove stimulus while Euro strength is driven by exogenous factors not supported by economic expansion.
The Australian Dollar
The Aussie outperformance comes down to China data. Specifically, industrial production increased by 7.2% YoY in February vs 6.2% consensus expectations that lit a fire under the industrial metals complex underpinning the AUD despite risk aversion creeping into the pictures.
The Japanese Yen
If it were not for the yen’s propensity to move on shifting risk sentiment, I do not think the pair would have any momentum. The USD/JPY remains very sticky in the 106 handle, but if this latest test of the 106.00 level ends in more disappointment for yen bulls out of frustration alone traders will start reducing long JPY positions, and on that narrative alone we could test above 107 again.
The Malaysian Ringgit
The market opened supportive yesterday as bond market flow looked strong but USD/MYR traded bid as regional equity market risk-off momentum gathered steam after news of Tillerson’s departure. However, with USD/MYR remaining well bid overnight despite the USD sagging suggests suspected foreign repatriation of funds for quarter-end / year-end were driving spot higher overnight.