Seeing the forest for the trees

Seeing the forest for the trees

With trade war dominating the landscape, even more so after this morning’s US tariff headline, it’s easy to focus on markets from a one-dimensional perspective. But cross-asset trading is multidimensional and observing the more granular details can offer much-needed clarity in these difficult times.

US Markets

Certainly, Trade war worries are taking their toll on global equities with even the Teflon US markets showing some fraying at the edges. But today’s compass suggests trade-related global equity weakness is due to tech, as opposed to emerging markets or China. Apple, for example, does a booming bilateral business with China and with investors veering to the notion that recent weakness in U.S. tech is a result of administration earlier tariffs then a 200 billion wallop is being perceived particularly damning even for the remarkably resilient US heavyweights in the tech sector.

Ultimately equity markets remain in wait an see as big unknown remains Chinas response which will set the tone for risk sentiment. After all, much of this tariff headline was well telegraphed.

We know China can’t go tit for tat as they don’t have enough US goods to tax. So, if there is a more heavy-handed approach such as flat-out import restriction or overtly weakening the Yuan, it could certainly bring the big market bears out of hibernation.

With the US  implementing a graduated tariff hike, starting with 10 % on 200 billion and moving to 25 % at the start of 2019. The ball is clearly in China’s court. While the   US tariffs salvo is hardly middling, it’s not a bad as it could have been, so unless China hits with draconian measures, markets should remain supported after this morning knee-jerk reactions. Ultimately the graduated tariff hike allows more room to negotiate before the thumping 25 % levy gets triggered, so perhaps China may temper their response accordingly.

Smartwatches and Bluetooth devices were removed from the tariff list, suggesting the President is “watching” the market while taking the US heavyweight giants and US consumer under consideration.

Oil Prices
Iran sanctions will continue to provide near-term support, while discussions around global demand in the wake of this morning tariffs and speculation of further OPEC supply increases should temper upside ambitions.

Oil futures posted a minor loss on Monday. After finding some support from potential global supply losses among various OPEC countries (Iran and Venezuela). But prices eventually gave way and are tracking the CRB index lower pressured on the prospects that US tariff will negatively impact global demand.

Also, Washington continues to suggest that Saudi Arabia, Russia and the United States can raise output fast enough to offset falling supplies from Iran.

The September 23 OPEC+ meeting in Algiers is taking on a bit of life of a life of its own as what was initially thought to be a be a fundamental review of production data by OPEC’s steering committee has now turned into 20+ nation affair. Suggesting everyone wants a seat at the table most likely to discuss the supply disruption from Iranian sanctions, which is leading to speculation that further production increases will be presented at the meeting.

Gold Markets

Another case of rinse and repeat
A modestly weaker dollar and aggressive short-covering pushed gold above the $1200 teeter-totter level, this despite a more hawkish lean from Fed-speak last week. Besides, haven buyers continued showing some bravado felling more confident buying gold when the dollar is fading which is provided with a subtle tailwind for prices overnight as investors brace for possible more massive tariffs than what’s currently priced into the markets. But price action remains entirely dollar driven. So, what the dollar giveth the dollar taketh as USD haven demand is back in vogue post-trade announcement.

Further risk response will be dependant on China response.

Currency Markets

I am challenged not dollar bullish from a pragmatic US interest rate storyline. But of course, price action needs to be respected especially with the EUR veering towards 1.1700 again. The strong US economy suggests USD yields have further room to run. And when former doves like Fed Governor Lael Brainard, who I dare say, is starting to roost with the Hawks, it’s giving clear signals that this sitting Fed is more hawkish than the markets 2019 rates lean.

The Chinese Yaun 

The primary trade war currency hedge is back in play with USDCNH moving above 6.89 as the market awaits Chinas response. But seller should emerge given how quick the market response has been to take USDCNH higher and the uncertainty over Pboc’s next move.

Euro

With Trade ware dominating headlines early Monday morning it’s easy to overlook some basics shift in EU zone fear index with European Bank Index and CDS curve suggesting Italy’s risk premium is getting priced out the equation. Even Turkey, despite another currency wobble yesterday, is stabilising somewhat on the recent astonishing CBT rate hike. The diminishing fear factors could push Bund yields higher and provide support for the Euro.

Australian Dollar

The Australian Dollar has weakened on the 20 pips on the tariff news in consort with USDCNH moving higher as the Aussie will remain a G-10 proxy for China risk, so it’s susceptible to more headline wobbles in coming days especially China response which could be extremely crucial for risk sentiment. But so far, the Aussie reaction is pretty much following the tariff playbook.

We do have the RBA, but I suspect its unlikely to alter today’s negative Aussie lean.

Japanese Yen
Risk has wobbled on the Trade headline triggering some modest haven moves to the Yen. But volumes are light, as frankly market at his stage are not panicking as the bulk of this tariff headline was already factored.

Canadian Dollar

The Lonnie is sagging, but this is possibly more about positioning as the markets found themselves short around the 1.3000, and with the CAD $ Perma -bears failing to yield that level,  the tariff headlines have triggered more short covering. But moves toward towards 1.3100 will likely be faded as NAFTA discussion are still going on.

Malaysian Ringgit

The recent support for EM central banks (Russian, Turkey and India) is buffeting the EM complex.
The 200 billion in tariffs, while negative for regional sentiment, is not as impactful for the Ringgit as the currency remains relatively insulated due to domestic oil exports and improved term s of trade. But higher US interest rates do pose some significant concerns, especially if a more hawkish fed vs a more dovish BNM does come to fruition.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes