Noisy Markets

Noisy Markets

The headline noise has been deafening and showing few signs of abating. In Asia focus will be squarely on equity sentiment even more with the Yuan under pressure as US/China tensions are set to escalate this week. US Secretary of State Michael Pompeo cited “fundamental disagreement” with China’s foreign minister after meetings, while a senior Treasury official suggested that the US is concerned about the recent depreciation in China’s currency and is monitoring developments. This should provide enough noise to wake the dead. But I think the real focus will fall on how US Treasuries Yields carry through in the context of the broader risk environment. But the market remains understandably brittle with US/China tension in the fore, EU stress over the budget and fiscal targets; and soaring US treasury yields that have caught the market complete flatfooted and have forced a repricing of the markets overly pessimistic view of Fed policy for 2019 through 2020.

However, Treasury markets reopen on Tuesday and after a tumultuous start to the month, it’s not going to get much more comfortable for bond investors as there is a significant amount of supply this week: USD230bn of Treasuries will be up for auction. Give the sizable number of bonds on sale, its unlikely bond trader had the stomach to go into this week’s auction owning to much inventory, so this too could have contributed to the recent Treasury sell-off

Asia Equity Markets

Equity markets have been trading poorly since US yields breached multi-year levels of resistance last Wednesday and continue to do so despite stimulus efforts by the Pboc, as China returned from its Golden Week holiday and played catch up to last week’s global equity weakness.  The massive near-term tail risk is that traders are back on US-China watch. A possible train wreck on the negotiation front could completely derail global markets. We should not underestimate the potentially destabilizing effect from a weaker Yuan will have on regional markets if not global markets. Indeed a path no one wants to go down.

Oil markets

Oil initially traded heavy by the prospect of the US potentially permitting waivers to countries who are seeking to continue the purchase of Iranian crude after the November 4 deadline.

But looking at last weeks data net longs in both crude benchmarks were slashed as investors’ confidence sagged not to untypically after printing multi-year highs as last weeks Inventory reports, and the ratification of NAFTA suggest supply-side risks dropped slightly.

Investors were clearly in profit-taking mode, and with the US potentially permitting waivers to countries who are seeking to continue the purchase of Iranian crude after the November 4 compounded by Saudi Arabia repeatedly stating that they had indeed boosted their output to offset the loss of Iranian barrels. They provided more than sufficient inputs to trigger a sell-off especially when the market was leaning in that direction.

However, prices reversed in the morning NY session after Canada’s biggest oil refinery, Saint John, was hit by an explosion and fire early Monday. The refinery processes about 300k barrels per day.

Traders remain on hurricane watch as some O & G platform in the Gulf of Mexico have shuttered as Tropical Storm Michael, which is expected to morph into a category 2 or 3 hurricane rips through the Gulf and will smash into the Florida panhandle midweek. Gulf oil insiders are reporting that 19% of Gulf oil production and about 11% of the natural-gas output have gone offline.

While St Johns and Gulf supply disruptions will provide a near-term fillip to prompt WTI, however, based on the dwindling global spare capacity narrative this rally could continue. And we don’t have to look much further than China ‘s policy efforts to bolster that view. Over the medium to long-term, it’s not too much of a stretch to assume more policy easing measures and increased infrastructure spending after China economy expanded at the slowest pace on record last month. So, for oil markets and commodities in general, the positive effects of China’s monetary and fiscal ambition could be significant.

But this brings us full circle to this week’s US inventory reports, while the markets were not overly sensitive to last weeks increases, given the focus is shifting to a more buoyant near-term supply narrative, there will be highted market focus.

Gold Markets

The markets again found themselves neck deep on oversold territory and with more chatter this morning about central bank purchases, the market is mulling. However, we’re still looking for confirmation on that Central Bank storyline. Update later but please call for any comments.

Currencies

Japanese Yen

With US yields providing a modicum of support but the sagging global equity markets have all but drained the life out the USDJPY battery. JPY traders were getting antsy as the 114 level was an immovable force given the sour equity market sentiment. When you start factoring in the negative implication of a move to 3.5-3.75 in UST’s its difficult to make a positive case for equity valuations. But the prospect of US-China discussion likely to deteriorate further in coming weeks, the 113.50 support gave way like a hot knife through butter,and with the markets on risk alert mode, no one is overly eager to get back on the USDJPY bullish bus.

Malaysian Ringgit 

China and US Treasuries remain the primary focus for EM FX, and with US-China negotiation going nowhere, we should see more upside pressure on the regional currencies.

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