Equity Markets
Equity markets clung on, at least for today, to the easing of trade tensions on the back of US President Donald Trump's ZTE (HK:0763) reprieve from potentially crushing sanctions. But with US yields again moving higher and the key 10-year UST nudging above 3 %, it indeed took the wind out of equity investor sails. None the less, the major US indices managed to eke out a positive close despite giving up earlier gains.
Look no further than then the far-reaching inflationary implication of higher oil prices underpinning US yields. Higher oil prices will continue to create the bumpy ride on equity markets, And while supportive of the enormous Oil conglomerate constituents, the cause and effect of higher US interest will most certainly weigh on valuations over a broader market.
While comments from US ambassador to China are on various newswires and he says, “The United States and China are still very far apart” on resolving trade frictions. He adds,”China agreed to do a lot of opening up when they joined the WTO, but a lot of the promises were not fulfilled. We want a timetable. We want to see these things happen sooner or later,” he said, suggesting the divide remains wide
Currency Markets
US fixed income continues to trade offered. German Bunds had bettered those moves after the tepid CPI print which held the dollar bulls back from re-boarding the USD bandwagon. Last week’s weaker US inflation print caused investors to increase their curve flattening positions, where they favour longer-dated Treasuries over shorter-dated issues But with US 10y revisiting the 3 % level, the USD dollar is opening the Asia session with a bounce in its step. But, Traders are decidedly mixed in G-10 flipping positions on a dime as the market continues to trade hypersensitive to US yields. And of course, since no one seems to have a reasonable handle on the trajectory of US interest rates, therefore currency markets remain muddled.
Oil Markets
Oil markets turned bid again on geopolitics. Yemen’s backed Houthis launched missiles at a Saudi Aramco facility, but perhaps the most significant flashpoint is violence that broke out on the Gaza Strip in response to the US’s inauguration of its Jerusalem embassy.
Which has triggered much discussion about the WTI-Brent spread (CLCO1 Index), which has plumbed into deeper negative territory.
The gain for U.S. benchmark oil prices wasn’t quite as impressive with traders wary of OPEC’s ability to offset crude supply declines and growing U.S. production. However, the wideners could be part and parcel with Oil traders going through the ritualistic Monday tendency of testing the markets downside resolve by overplaying the jump in Friday rig counts.
But adding the overall bullish narrative are signs that global oil market continues to tighten as the monthly OPEC report suggests a very balanced supply and demand dynamic with stockpiles running a small 9 million barrels above the five-year average.
But in general, the market is wholly focused on the hornet’s nest in the Middle that is an accident waiting to happen.
Gold Prices
Gold prices remain tethered to the hip of the USD which continues to be the most dominating factor driving sentiment. Also, investors are erring on the cautious side ahead of tomorrow Retail Sales, as history has a way of reminding us never to understatement the purchasing power of the US consumer. A better than expected print would give the Federal Reserve more cause to raise interest rates would naturally push the dollar higher. But with US yields testing the 3 % level in 10 Yeas UST, rates are also weighing on Gold sentiment, this despite slightly wobbly equity markets and the abundance of geopolitical headline risk.
Malaysia
The political risk premium has tentatively evaporated after the markets opened and traded reasonably well yesterday on affirmative council appointments made at the weekend, the central bank backstop after BNM reaffirmed it would continue to ensure clean conditions prevail in onshore financial markets, and of course the tight MYR-BCO (WTI) correlation.
But investors are indeed not crashing the gates to increase economic MYR risk; instead, it was the placid open which caused bearish MYR bets along with pre-election hedges to unwind. But the positive Ringgit sentiment came on the back of the local supply where Malaysian dealers were comfortable selling dollars using the BNM as a stop-loss order. Even more telling were the local Pension funds which were on the bid (bond and equity markets) all day providing strong support levels.
At 3.95 the market continues to bake in ~.05 political premium on the back of the GST uncertainty and how the debt agencies perceived scrapping the unpopular tax. But in addition to the to the political risk, ultimately what does matter is the future direction of both the USD and US bond yields. Given the anticipated bumpy ride over the next few weeks, for some, there was not enough of a fire sale to comfortably re-engage the Ringgit, and it remains highly unlikely investors will chase the MYR higher until the all the government’s cards are on the table. Expect some consolidation today.
Currencies Views
EUR: The long and short of it. Interest rate differential continues to drive the bus. While the lower EUR does suggest the ECB would be more willing to raise interest rates sooner than later, members are very guarded with their language not wanting to ignite an EUR rally and traders starts tripping over themselves to get EUR/USD topside exposure on a definitive policy shift.
JPY: Providing JPY colour for the past few weeks has been a copy and paste, so why change today. “While US fixed income remains, the primary driver suggesting USD/JPY moves to 110 but without a spark on the US inflation front Please make me a believer!!