What started as an innocent equities correction in Asia, spilled over into the NY session yesterday, as classic risk-off unfolded. US yields dipped, oil and gold prices rocketed higher.
Risk sentiment is on its back foot this morning with global equities and commodities weaker. The catalysts are nothing new and are a toxic geopolitical cocktail of nagging concerns:
- Chinese growth levels (despite recent government stimulus)
- Lack of progress on Brexit (despite reports that a deal is near)
- Italian budget issues and
- The Khashoggi investigation
But significant for global equity investors, the US equities Teflon persona was seriously questioned as price action suggested there is one asset class investors fear: equities. And like migratory birds heading south for winter, the icy chill enveloping global stock markets has sent investors flocking to safe to haven assets.
The writing was on the wall when equities traded weaker across the board after Monday’s intervention-induced rally in Chinese stocks had little effect on global sentiment and reversed sharply lower in yesterday’s Asia session.
But for me, it was the Bloomberg headlines that suggested the PBoC plans to give CNY10bn to guarantee firm China Bond Insurance to provide credit support for debt issuances by private firms. That sent off alarm bells rather than support equity markets. Often these types of interventions suggest much deeper rooted economic issues and as we saw from yesterday, market action can trigger a negative backlash.
With the S&P now drawn into the global equity maelstrom, gold and bonds are the safe havens, not king dollar which is trading slightly weaker if anything from yesterday with USDJPY leading back towards 112 and EURUSD failing to break through 1.1430. A move lower in US equities does create haven flows and gives the greenback very mixed feelings about it.
But with so many crosscurrents swirling, Italy and Saudi fears combined with US domestic concerns over what has suddenly become a collapse in the housing-related asset has made for a toxic combination sending equity investors packing. Many are now expecting a much bigger fire sale before re-engaging as risk aversion feels like it has much further to run.
Still, with no key US economic data for markets to tether themselves to, buckle up. There are a plethora of potential potholes to navigate on Wednesday in the form of an expected Bank of Canada rate hike, PMI prints for EUR, while USD sees Fedspeak and a fresh Beige Book. A hawkish Fed lean will add more fuel to the already raging market fires.
And finally, if you don’t think China-US hopes are fading, with both sides now looking set to dig in for the long-haul, markets could get much worse before they get better. Asian investors better hold on to their hats, as markets are about to get extremely blustery.
Oil Markets
The long oil contract unwinds continued with front-month WTI and Brent plunging more than 4 % in heavy selling on the combination of macro weakness, and more headlines from Saudi Arabia about their ability and willingness to increase production are the primary catalysts. Indeed, the petroleum complex extended their slide after Saudi Energy Minister Khalid Al-Falih stated that OPEC’s current policy was to “produce as much as you can” to reassure customers that they are ready to meet “any demand that materializes.”
Let’s not have any illusions about this shift in Saudi policy; this is about oversupplying markets' short-term needs, not just adding barrels to meet Iran and Venezuela shortfalls and this nascent shift in Saudi policy could translate into a much more significant impact for energy markets.
US weekly petroleum inventory data did little to stem the tide after the American Petroleum Institute (API) reported a massive build of 9.88 million barrels of United States crude oil inventories for the week ending October 19, compared to analyst expectations that this week would see a hefty build in crude oil inventories of 3.694 million barrels. Threatening a deeper free fall as whatever bullish remnant remain are heading for the exits.
Gold Markets
Gold is following the yen and US Treasuries, of course, as risk aversion is in play. But frankly, we’ve been dealing with this for months. The difference this time around is the US dollar does not have a go-to haven appeal it had from escalating trade war tension. The latest Gold Rush is a direct result of tensions between the US and Saudi Arabia and increasing nervousness about risk assets.
Increased US-Saudi strains have Middle East geopolitical embers burning and gives rise to the notion that regional sparring partners will compete for the influence which could ignite a middle east powder keg. While the gold market still fears the Feds, on a broader and more pronounced equity rout, however, this will bring the Fed December rate hike into question. Gold prices were unable to hold gains after testing above 1234-36, but traders remain on watch given US equity markets weaker complexion.
Currency Markets
Despite all the market hoopla, G-10 moves were very pedestrian suggesting as we have thought all along, currency markets are suffering a bad case of trader fatigue.
The Malaysian Ringgit: It’s hard to find a silver lining in the market with global risk sentiment going into the tank and oil prices following suit. With the upcoming budget looming ominously, it suggests the ringgit will continue to trade with a defensive posture.
The Pound is entering that mode again, where no position is a good position as the negative headlines continue to compound extremely negative sentiment on sterling.
The Yen rallies on haven demand, but tremendous support remains at 112 which should keep USDJPY downside in check at least until the traders have then next negative equity mood swing.