There’s significant risk ahead.

  • Markets
  • Oil
  • Brexit
  • China
  • G-10 ( EUR)
  • Gold

There’s significant risk ahead.

US equities finished mostly lower after a and extremely intense session as oil prices were hammered mercilessly dragging the energy sector stocks into the abyss while any hope for resolution of the U.S.-China trade spat could remain little than a pipe dream given that there is no certainty China will buckle to US demands.

But it’s going to be a bumpy ride for markets magnified by multiplex Brexit developments, sagging equities and of course 7% drop in oil but on the data front, CNY retail sales, CNY IP and USD’s core CPI report will be Wednesday’s headline events. All of which suggests significant risk beckons

Oil markets

Crude continues to extend its declines with US markets registering a 7 % drop overnight. Oil prices remain the hottest topic in capital markets if not in the world after extending their slide to 12 days and suffering one of the more precipitous falls in years.

It’s all about the toxic combination of weakening global demand and oversupply that has sent prices tumbling. This week’s initial catalyst was President Trump after tweeting oil prices “should be much lower based on supply” iBut taking their cues from sagging equity markets which are flashing red on global growth concerns, oil traders continued to pound oil prices lower suggesting this trend could extend.

Additionally, OPEC mentioned in their Monthly Oil Market Report, released yesterday, that they see demand for the cartel’s crude declining at a more rapid pace than initially anticipated in 2019 (due to a slowing global economy)

While declining global PMI’s are supporting a strong case for a desynchronized overall growth narrative, China’s new yuan loans have dropped much more than expected in October, according to the PBoC, coming in at CNY697bn (vs 904bn expected). M2 Money supply increased by just 8.0% when it had been expected to rise to 8.4%MoM. But more significantly aggregate financing also dropped to CNY728.8bn (a big miss compared to the 1300bn expected) As per Bloomberg: “Aggregate financing includes bank lending, off-balance-sheet loans and bond and stock sales”. This print is a massive miss suggesting and validates the negative outlook for China in Q4.

This data is signalling much slower growth in China and by extension global growth, which likely attracted a plethora of cross-asset types to join the Oil selling frenzy. But when the hoard mentality sets in at either side of the equation, my experience tells me to look for a reversal.

On the supply side of the equation due to the U.S. holiday Monday, the weekly inventory reports will be a day later than usual with, the weekly API inventory report due Wed 16:30 Est with the official DOE numbers to be released on Thursday morning (11:00 EST). But both Bloomberg and Reuters surveys are suggesting crude stockpiles are expected to have increased yet again (3-3.5 million barrels) while reports also see Cushing inventories increasing some 2.5 million barrels.

On the heavily subscribed EIA Monthly Drilling Productivity Report as well as the IEA’s World Energy Outlook for 2018. U.S. shale oil output to rise 113,000 barrels per day to 7.94 million barrels per day in December( Reuters)  confirming that oil markets are dealing with  a shale oil supply shocker

Brexit

The Pound his heading up again this morning on positive Bloomberg headlines: *RAAB, HUNT, JAVID, GOVE AND COX TO BACK MAY’S BREXIT DRAFT: SUN.

In what could be a watershed moment, British and EU negotiators have finally agreed to one of the most contentious divorce battles in recent history.

China

Chinese shares rallied, the yuan strengthened slightly, and USD bulls tapped the brakes ahead of tonight CPI. But there were some USD haven reversals in play after the market is reacted positively to SCMP headlines reporting that Chinese Vice Premier Liu He will visit the US to set the stage for the Trump -Xi meeting at this months G20 in Argentina.

Although my pessimistic radar is sending off negative signals about this meeting, where there a will there is a way and provided discussion continue the market will continue to see the light at the end of the tunnel. But I’m still having trouble getting over yesterday China M2 disaster print, but maybe that will change if we see some positivity in China’s data dump today.

G-10

It is a massive day for the dollar with US core CPI later today. Also, traders will be all ears on two key Fed speeches. The House Financial Services Committee plans to hear semi-annual testimony on banking supervision from Fed Vice Chairman for Supervision Quarles at 15:00 GMT/10:00 EST. While Fed Chairman Jerome Powell will also discuss national and global economic issues with Dallas Fed President Robert Kaplan at an event hosted at the Dallas Fed at 23:00 GMT/18:00 EST

Euro

The Euro has recovered from oversold conditions yesterday on a combination of profit taking amidst positive Brexit headlines. But I can’t help but think this move is little more than a Brexit induced sympathy rally As EU data continues to underwhelm with German ZEW Current Situation missing at 58.2 vs 65.0 expectations. Italy will hold its 2019 deficit target at 2.4% (as expected) but also keep its GDP target at 1.5% But this response will ultimately fall short of being viewed as a viable solution.

Gold Markets

Gold is hanging around towards the lower end of the one-month range. But appetite remains muted even with US equity markets failing to regain composure and a slightly weaker USD. The lack of upside momentum suggests aggressive USD rally post US midterm election is having a negative impact on Gold demand.

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