Risk Aversion Lingers

Risk Aversion Lingers

It was a shaky day for US equities, but the broader indexes did manage to claw back from the depths of despair but still ended the day slightly lower only 24 hours after the most substantial gains in 6 months and reminding us just how fragile investor confidence is.

Risk aversion continues to permeant across global markets. While Oil prices were leaking everywhere (blame inventories), industrial metals also trade on a soft note. While there isn’t one reason, but there’s a sense of foreboding in the air. that the next US equity correction could be the ” big one.”

President has gone  postal 

But I’m looking no further than the President ratcheting up the rhetoric by ” going postal ” on China. Indeed US-China tensions are back on the radar, particularly with NYT suggesting Trump’s next target will be China’s cheap postage services. But the headlines aren’t much better in Europe which is intensifying investor jitters. There is zero expectation for a Brexit divorce agreement coming out of EU Summit while Italy budget is widely expected to be rejected by the EU. Late NY headlines from Reuters say that EU leaders are dropping plans to hold a November 17-18 summit for now – they are ready to meet again “if and when” the EU’s chief negotiation reports that decisive progress has been made in negotiations. An amicable Breixt divorce has certainly taken another significant hit.

The Greenback 

The USD rallied Wednesday, reflecting two forces: unwind of the prior two sessions of US weakness as USD haven flow picked up, and FOMC minutes which confirmed the Feds would continue to normalise rates for the foreseeable future.  This was the tail risk going into the minutes as some market participants thought the FOMC would walk back some of the markets more hawkish interpretation of Jay Powell post rate hike presser.

US Treasury FX Report 

Though released a little later than expected, the US Treasury’s semi-annual report on currencies was mainly in line with what was leaked to the press late last week: once again, no trading partner was named a currency manipulator. Moreover, the same countries – China, Japan, Korea, India, Germany, and Switzerland – were on the Treasury’s monitoring list.

Though China was not explicitly named this time, this report however materially escalated its language against China – in four significant ways.

1) The executive summary focuses on China’s history of unfair trade practices
2) China had their section while everyone else was grouped into another
3) The Treasury will review the RMB in 6 months
4) But the one major caveat is, and something the markets were suspecting all along. ” “as a further measure, this Administration will add and retain on the Monitoring List any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act”.

The report comes out in line with market expectation and gives the markets another six months of breathing room. Hopefully, US-China can make some headways on the trade front. But giving China their section in the report suggests that the US Administration is ready for more punitive response China should discussions between Trump and Xi fail to yield results at next months G20

I guess we can breathe, at least for now, a temporary sigh of relief as we await the President who no doubt chime in on the US Treasury findings.

Oil Markets

A sizable shocker into this week more definitive EIA Weekly Petroleum Status Report which has sent Oil markets spiralling lower  amidst some concerning development for Oil bulls

The DOE data for last week significantly more bearish than Tuesday’s American Petroleum Institute report, with crude stocks increasing 6.5 million barrels per day. This is particularly dispiriting on two fronts: (1) markets had positioned for last weeks bumper inventory report to retrace (2) API on Tuesday suggested we would see a draw.

However, Petroleum prices were testing the downside in London and early New York before the inventory data even after a Tuesday report from the American Petroleum Institute. The de-escalation in US-Saudi tension suggested the market was very prone to a downside correction on any inventory build.

So, for today at least it could be a case of how low prices will go rather than how high.

But given the Iran sanctions and uncertainty around the spare capacity debate $80 Brent should provide solid support, but oil bulls have considerably less breathing room than they had yesterday.

Gold Markets

The US dollar refuses to stay down for the count which saw gold prices fall to the bottom of recent ranges. But the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst still make gold appeal a favourable tail hedge against these escalations. Despite the FOMC minutes cementing the Feds rate hike view, the US midterm elections to pose a significant headwind for both the USD and US equity markets as such Gold should remain a favourable hedge over the short term

Currency Markets

Nothing else matters but the RMB

Chinese authorities are a lot more sensitive about the RMB on a trade-weighted basis rather than on a bilateral basis against the United States, and with the markets trading at the bottom end of the CFETS basket range, there will be more focus on the basket after two specifically odd fixes towards the end of last week. So, the debate rages if last week is a signal for a shift in policy. If authorities decide to let this CFETS level go, it will open a massive can of worms that should see USDCNH rocket higher and will have a positive knock-on effect for the USD.

Regardless of which direction the USDCNH moves the RMB will remain at the epicentre of currency markets and will drive the near-term direction of the dollar.

So, for local ASEAN currencies, I suspect they too will be held hostage to the RMB moves.

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