Asia Wrap
It was an intense session in Asia today with headlines driving sentiment, again. Risk tanked on expectations that President Trump would sign the US bill supporting Hong Kong protests. Safe-haven assets were well bid all morning until Bloomberg reported on China top trade negotiator's cautious optimism about reaching a Phase 1 deal with the US. Treasuries shredded earlier gains as e-minis rallied 20 points to regain 3100 levels.
Asian equities however traded lower across the board as the latest sell-off hasn't likely run deep enough yet to entice aggressive bargain hunting although the markdowns have seemingly abated.
Senate's passage of the Hong Kong Human Rights and Democracy Act: In the bigger picture, the details of this bill are relatively tame -sanctions against human rights violations isn't new. Also, as we saw with Huawei, the US and China have, in the past, been able to compartmentalize issues from the broader phase one trade negotiations.
Of course, Hong Kong is exponentially more significant than Huawei. Still, China also must be down to earth, realizing that fighting back against this US populist movement, they could lose badly in the global court of public opinion. I’m not suggesting It’s a storm in a teapot, but the market has taken this news well in stride. After all, the HK bill shouldn’t come as a surprise.
ASEAN currency markets were getting driven more on emotion rather than economic realities, and the market was growing ripe for a reversal. Optimism on US-China trade relations was papering over the cracks in the dreadful China data.
The walk back on trade deal confidence my have turned currency focus back to the economic realities, and without a domestic growth, trade deal optimism alone is not enough to carry the day.
Even more telling and despite gnawing macro leverage concerns, China's economic data was terrible enough to trigger the PBoC into action providing a liquidly sugar boost despite the policy scope limiting inflationary concerns.
So, with trade optimism taking a hit, ASEAN currency markets are starting to sag as the economic realities take hold. I must reiterate however, currency market views have been trading on a 48-72-hour time horizon, so nothing is ever written in stone other than the fact the USD dollar remains in a range.
As for oil and gold, it's either door A or B as both markets remain tethered to the beat of trade talk narrative.
Picking up from the midday note on the Korean Won perfect storm Kospi shares net sales by foreigners hit KRW573B largest outflows since August
Korean Won
It's the perfect storm of negativity for KRW today. Risk traded offered on the Bloomberg report of the possibility of US President Trump to sign the Hong Kong bill, weak export data and then a Reuters report on Trump considering troop withdrawals from South Korea if Seoul doesn't agree to demands of contributing more to the cost of stationing those troops.
USD/KRW is trading bid after the disappointing 20-day export/import data. Kospi is down 1% with foreign investors net selling $77 mn of South Korean shares so far.
Hong Kong bill
I'm still struggling to see how this Hong Kong bill is coming as a surprise to the trade negotiations. One must assume the key to defining the quality of the US-China relationship beyond Phase One was the narratives around HK and Huawei. So maybe this HK issue will be compartmentalized into Phase two whenever that happens.
But I'm sticking with the view that while investors remain tuned in, they could soon be dropping out of the markets as the headline ping pong is getting beyond annoying.
RoRo ( risk-off risk on)
China's top trade negotiator Liu He said in a speech in Beijing on Wednesday that he's 'cautiously optimistic' about reaching a Phase 1; presumably, this story reversed out some of the guardedly pessimistic views that were leeching into investors psyche this morning
Asia open
Bowing to bipartisan pressure
It looks like President Trump is bowing to bipartisan pressure, where he is expected to sign the Hong Kong bill into law according to the latest headlines.
Sentiment remains exceptionally cautious amid heightened trade uncertainty around this latest event, potentially complicating the US-China trade outlook.
The headline saw the S&P 500 initially breach 3100 as investors are continuing to protect profits by taking equity chips off the table as a degree of pessimism sets in. But I do wonder just how engaged with markets investors are now amid all this headline table tennis. While investors remain tuned in, they could soon be dropping out also. After all, once the algorithms have moved markets on headlines, there very little juice left unless you are content to play the risky game of mean reversions.
The question now is whether it's possible to compartmentalize the Hong Kong Bill away from the phase one deal or makes the US offer bigger sweeteners as the President suggested earlier "we're looking at whether Apple (NASDAQ:AAPL) should be exempt from China tariffs. Or will the trade deal morph into something greater than initially thought?
US markets
US equities were weaker Wednesday on a resurfacing of trade tensions as Hong Kong Bill found itself in the middle of US-China trade tensions. And for what it's worth, the Phase One trade deal between the US and China may not be completed before the end of the year. It could "slide into next year," according to Reuters, which cited trade experts and people close to the White House. The report said China wants more extensive rollbacks of the existing tariffs, and the US is making its additional demands.
Then for good measure, shortly afterward, White House Deputy Press Secretary Judd Deere said, "Negotiations are continuing, and progress is being made on the text of the phase-one agreement," according to Fox News. Which just adds to the confusion.
Bond market
US ten-year treasury yields retraced another 5bps, taking returns down to 1.73% on the back of a convexity driven bid as the broader market sells-off on a flurry of futures volumes after the Reuters report.
In this environment, the technical picture takes on added importance, especially given the dominance of CTA's in the market. The belief on the street is that the CTA's are now short so that a fixed income rally could be a pain trade for them. And with discretionary accounts heading for the sidelines ahead of year-end, the CTA’s could be a significant influence on the market. So even fundamental purists like myself are looking at all the squiggly lines on the chart for no other reason than others are doing the same.
The FOMC statement
The positive outlook, muted inflation pressures, and downside risks all remained the ongoing narrative in the FOMC minutes. There was nothing in the details to change the idea that the Feds would react to downside pressures and not stray too far from the rate cut lever, but for now, the Fed is in on pause all else equal.
Complacency
The market remains far too complacent about risks heading into year-end. I suspect this is because an equity rally suits most people, and that the current high gloss veneer is covering up many a market imperfection.
Oil market
It was a solid session for oil markets with WTI currently up as much as 3%. Earlier on Wednesday, the EIA reported that overall Crude stocks rose 1.4Mb, about in line with consensus for a 1.5Mb but a significantly smaller build than the 6Mb build reported by the API. However, the market latched on to the fact inventories at Cushing fell 2.3 Mb barrels, the most significant drop in three months.
The inventory build was lower than last week's as refinery inputs rose significantly, and net imports slipped as a result of the Keystone pipeline outage factoring into a bullish report.
But unless global growth recovers more than expected, top side aspirations merely come down to the US-China trade deal. More precisely, a trade deal would allow held back big business investment decisions to move forward and possibly turn around the faltering momentum in Indian oil import demand, which could soak up a large portion of the supply glut.
Currency markets
USD/Asia has been better bid following news around the Hong Kong bill as the market awaits the specificity around and expected retaliation by China if Trump signs the bill into law and likely So, we could see this long Asia currency position squeeze continue.
The Ringgit has fallen as the regional basket is caught on the same boat as local traders are opting on the side of caution, although it would be a real stretch to describe price action as risk-off with the S&P 500 gravitating back above 3100 and USD/JPY stabilizing around 108.50.
So, while traders gradually pare back Asia currency risk, they are not turning entirely negative as to a degree they still see the US-China trade deal inching forward. Honestly, from yesterday's negative headline hype, you would have expected falls of at least 2% in Asian markets. That was just not the case.
As far as local ASEAN currency appeal in this malaise, with a bid under gold, from a cross-regional currency perspective, factoring the Gold-THB correlation and Thailand's substantial foreign exchange reserves, it suggests the Thai Baht will continue to feature as the regional haven umbrella.
Gold market
Gold remains sensitive to trade and subject to changes in trade sentiment, notably US-Sino negotiations. FOMC statement appears neutral to negative for gold prices short term, but geopolitical issues look supportive over the longer time. However, the gold markets have all but drawn a straight-line vector between a trade deal and the price of gold.