A lot is being made of the YouGov MRP poll out on Tuesday, which shows a tightening race into the vote tomorrow. Sterling continues to sell off as London walks in. The poll suggests a Tory majority of 28 and within the margin of error for a hung Parliament. The seat projection interprets to a nine-point lead, down from 11 two weeks ago. The hurdle to avoid a hung Parliament has always been around 7% (no vote has been won by more and not lead to a majority) so this poll is not an outright disaster for risk.
Still, overweight sterling positions continue to shed significant " poundage" as 2017 election results sure do cast a long shadow
Asia Wrap
Asia drifts on little sign of trade talk breakthrough. MSCI's broadest index of Asia-Pacific shares outside Japan drifted 0.1% higher, as markets in the region wavered either side of flat. Japan's Nikkei 225 traded 0.2% lower, Australia's S&P/ASX 200 rose by the same margin.
But volume-wise it was quiet in Asia today ahead of the FOMC later. No rate cut is priced for the meeting, with the market's focus instead on updated 2020 dot plots and repo operations into year-end.
The main headline which slightly reversed last night's Treasury futures selloff was White House trade adviser Peter Navarro saying that no decision has been made on the additional US tariffs on China, ahead of a Dec. 15 deadline
USD/CNH bounced off the overnight low, with comments from White House trade advisor Peter Navarro. Similarly, for USD/ASIA, the spot is trading a bit higher, but vols aren't doing that much as the weekend gap move is priced just under 60 bp. That could widen however as Europe walks in has their say on the Navarro headline
So the headline ping pong continues. However, its the confusion in the Trump camp that's worrying, especially with only days to get the agricultural quota issues with China resolved.
On the one hand, with Sony Perdue The United States secretary of agriculture is the head of the United States Department of Agriculture whom you would think would know a thing or two suggesting a tariff deferral, but then within the span of 24 hours Navarro contradicting that message.
Oil Stuck In Trade Talk Limbo
Oil is getting weighed down by the unexpected climb in US crude stocks and confusion in the Trump camp over the December tariffs. It is an indication of the positive impact of the new OPEC+ agreement that Brent is still holding close to $64/b. Whether this level can stick if the US crude build is confirmed later today in official EIA data remains to be seen, but for now, the market's sentiment still seems relatively stable. Still, if the trade talks are moving along amicably a December tariff deferral makes sense to avoid at all cost a total breakdown in US-china trade negotiations.
Gold Buying Up
London appears to be picking up on this confusion in the Trump ranks and has been buying gold at the open. Although gold has been very much rangebound of late, it does offer the easiest and the cleanest hedge against both trade war escalations and or equity market meltdowns.
Also, there appears to be some heightened risk around Brexit filtering into the equation as the European desk seems more uneasy than their Asian colleagues about the YouGov poll. A bit surprising really as the seat projection interprets to a nine-point lead, down from 11 two weeks ago. The hurdle to avoid a hung Parliament has always been around 7% (no vote has been won by more and not lead to a majority) so this poll was not a complete disaster for risk in Asia.
But I don't see gold falling off the cliff anytime soon as the feds won't raise rates in the next year or even two, so gold should be a regular feature in one's asset allocation during periods of market uncertainty especially when interest rates are low.
But I think gold upside will be minimal ahead of the Fed meeting as focus on the FOMC dot plots are the main feature With the chance, there could be anywhere between 1-3 dots in favor of hikes in 2020 dots reinforcing the hawkish skew within the committee, gold could trade defensively in the absence of a trade talk breakdown.
But more support for gold on the way? look at the US dollar.
USD
The USD's inability to rally meaningfully last week on robust NFP data is starting to concern G-10 traders as it suggests the market's long USD more than it wants.
While short-term measures (e.g. IMM) indicate only a moderate level of USD longs, they don't tell the full story. Capital flows data suggests longer-term investors are overweight/hedged USD, which could limit the USD appeal even more so with the Fed parked in neutral and unlikely to raise interest rates anytime soon. And with global data apparently bottoming especially in the Eurozone, it should embolden the US dollar bears even more so vs the euro