Global markets are enveloped in a classic case of risk aversion.

Global markets are enveloped in a classic case of risk aversion.

Global markets are enveloped in a classic case of risk aversion with all the main risk off hallmarks showing up in virtually every corner of the market. The S&P is down below the 200d moving average, FX carry is very wobbly, and  US 10y yields have corrected lower. Taking their cue from Asia markets North American traders read negatively into the USTR’s focus on China rather than the fact the report didn’t step on anyone’s tail. But the painfully raw price action from BTP-Bund spreads widening to a five-year high  triggered the latest  freefall  as risk assets virtually melted across the board

This week’s US earning inspired equity markets rebound is but a fleeting memory and has given way to the lurking reality of bubbling trade-tension, geopolitical unrest, Italy risk and a hawkish fed narrative.

I guess when the Charmian of the world most powerful Central Bank views the US economy in the context of ‘remarkably positive outlook’ it’s probably not a great idea to assume the FOMC will walk back any hawkish interpretation.

While the US markets have been somewhat insulated from China equity market meltdowns this year, that strong historical correlation that “when China sneezes the rest of the world catches the flu” is starting to take hold. But things could get worse as the Yuan depreciation train could be arriving at the station anytime soon. Indeed, USDCNH warrants a high degree of attention as the test of the vaunted seven level looks increasingly inevitable as based on current price action more CNY/CNH depreciation is in the tea leaves.

And for good measure, not that I’m overly superstitious, but for the Chinese, number 7 can also be considered an unlucky number since the 7th month (July) is a “ghost month” and homophonous with death.

Yuan

Are markets prepared for the destabilising effects of a rapidly weakening Yuan as we draw ever so ominously near another leg of RMB depreciation?

In the wake of a few dubious Yuan fixings of late, the Pboc are indicating a more lenient stance towards RMB depreciation.

The CFETS index has broken the 2017 low of 92, which may suggest more CFETS depreciation is necessary given further tariff threats, but the lack of capital inflow is what telling which is naturally weighing on support for the RMB, all of which is suggesting the depreciation train is nearing the station.

Oil Markets

EIA Weekly Petroleum Status Report was a complete shocker sending Oil markets spiralling lower amidst some concerning development for Oil bulls.

With risk sentiment going into the tank and investors rehearsing worst-case scenarios around the asynchronous global growth sinkhole. Compounded by China contagion fears, there was hardly a bid to be found in New York markets. This significant price action and discovery suggests traders are no longer concerned about how high price will go but rather how quickly they will fall, as for today at least the bid on dip mentality has run for cover.

With any notion that  Riyadh would cut output and push oil prices higher a distant memory, Tanker Trackers data showing that Iran’s oil exports in the first two weeks of October were 10% higher than September averages compounded by massive worldwide inventory builds as the so-called ‘ hoarding effect” intensifies  Not to mention increasing chatter that Saudi Arabia will increase production. What appeared to be a ” sure-fire bet” for supply shortfalls when Iranian oil exports drop significantly in November, it’s has morphed into a bit of a white-knuckler of a trade.

On the bright side, however, since I remain unabashedly bullish on oil markets. So, after an 11 % fall and subsequent shake out in a mere two week, positions are much cleaner, and the fear of getting caught up in the crowded trade mentally heading for the exits has receded considerably. So it could be time to step back up to the plate. You know the old saying, no pain no gain!

Gold Markets

Gold prices are for the time being are held back by the stronger USD. 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 (Rinse and Repeat yesterday’s currency view)

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.

The Euro 

The Euro is worth noting as  EURUSD was dragged down on broader USD sentiment, but events of its own made it worse. Troubling Italian news hit one hour into the London close causing a calamitous meltdown in EU risk

Media

Join me on Channel News Asia this morning at 7:30 AM SGT to review last nights price action Channel News Asia

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