Establishing views on cross asset classes on Monday morning is becoming increasingly difficult.
The tricky environment I am looking at today
Emerging market issues are still lingering, amid an incredibly shaky outlook, the S&P 500 remains robust, stable and seriously sturdy, US yields continue to march higher, and the US economy continues to outpace its peers. But so far, it's a quiet start to the week with G-10 broadly unchanged from NY close with very moderate trading volumes across a plethora of generally active asset classes. The low participation from investors to start the week is likely due to the intense focus on trade war.
The NFP effect
However, the US economy will be the driver early in the week given the NFP data was of knock it out of the park stuff. “Friday’s NFP was at 201k – the first time in 20 years that an initial August print was above 200k. The average hourly earnings were +0.4% making year on year 2.9% for the first time in 9 years having held 2.8% four times since the Fed started tightening.” This was massive - No wonder the US yields marched considerably higher as there are fewer and fewer reasons for the Fed to remain accommodative.
The US economy vis a vis the latest NFP print is driving the bus and has thrown ice water on any hopes for a pause from the Fed, which will likely keep its hawkish narrative intact.
China Syndrome
However, China’s economy, in juxtaposition, despite the front-loading effect in the recent trade data: going forward Chinese exports are likely to factor negatively in any calculus due to the US tariffs. China's outlook appears increasingly dour after the President all but doubled down on his latest tariff tantrum. While the market’s pricing in 267 billion at 10 % according to the most recent Presidential bluster suggest the hawkish elements within the administration are prepared to tax all Chinas imports which would tally over $505 billion based 2017 data provided on the USTR website. But adding in the recent wave of tepid economic data, there should be more downside for China equity markets and a higher USD/CNH.
Oil Markets
The strong dollar and sagging equity market seldom augur well for oll prices but last week price action lower was likely driven by too much froth in the market as bullish bets increased around two critical possible supply disruptors, specifically Tropical Storm Gordon and protest in Iran, neither of which proved to be significant at all.
In addition, there were EM concerns that triggered a broader wave of commodity carnage and despite Oil holding up relatively well during the tumult, as Iran sanction continued to resonate supportively bullish for oil prices, there were just too many negative ducks lining up and base support levels gave way as bullish funds moved support bids lower.
Money managers continue buying into the market viewing the Iran sanction as the most significant near-term drivers dwarfing risk from emerging markets, which are basing given the depth of concerted central bank intervention and the US -Sino trade escalations, which remain a complex metric of confusion on how that will affect oil prices near term. But indeed, the Iran sanctions do look like the next big money trade, and this likely bullish sentiment should remain the dominant theme.
According to Baker Hughes, Oil rigs fell again last week adding more industry woes to American drillers, but like for Cushing, the inventory buildup is more a function of pipeline bottlenecks as opposed to waning demand.
As usual, there will be an intensive focus on trade war this week; Inventory reports will be a massive sentiment driver after last weeks substantial gasoline builds and even more so after testing the downside of the oil futures market resolve and WTI produced a bearish outside week.
Gold Markets
The markets continue to look for that golden lining. But the primary issue is that haven demand remains fleeting in the presence of the stronger dollar narrative. As such, Fund managers continue to add to bearish bets driving makets deeper into oversold territory. While the crowded trade mentality has the Gold bulls dipping their toes into the uncertain water on a pullback to the low 1190, the fact remains, the general malaise on commodities coupled with the stronger dollar suggest seller emerge on rallies. But unless something gives on the USD or interest rate front would be confined to the near term well-worn paths between the $1190-1210 goalposts.
Currency Markets
The surging NFP should support the USD ahead of Thursday’s core CPI, factoring in lower gas prices, but adding seasonality factors back into the equation has trader leading bullish, and similarly for PPI.
Australian Dollar
The ongoing weakness in commodity markets, strong US dollar and the plethora of domestic issues should see the Aussie trade off its back foot and will continue to be faded on upticks. The saving grace for the Aussie ultimately comes down to resolving the US-China trade spat which as this juncture could be a bridge too far.
The Japanese Yen
Even though the US yield appeal suggests USD/JPY higher with Japan getting added to the trade war saga, the Nikkei could remain extraordinarily fragile, and cap topside moves on USD/JPY early in the week. Besides with the markets bracing for some tariff impact, we could expect knee-jerk reaction into have trades.
The stronger USD as supported by stellar NFP data and jittery local market that remains focused on the destabilising economic effect of from US-China trade escalation suggest participation will stay low as regional speculators and trade war hedgers are moving back into long USD/CNH. which produced a bullish close on Friday.