Yuan watch
USD/CNH rejected the leg higher last week. Technically, one could weave a convincing tale that the weekly candles suggest a limited upside from here. Still, the market is mostly at the mercy of trade talk headline risk, and the frequency of these updates should pick up this week ahead of December 15, thought to be the line in the sand for the U.S. to impose more tariffs.
Last week provided a not so subtle reminder that when it comes to trade wars, it’s never over till it’s over. But the yuan rallying into week's end on the back of expectations that a deal will happen sooner or later did reinforce our argument that the markets will continue to price in peak tariffs and a possible tariff rollback.
USDCNH bounced higher at today's open on the weaker CNY export data. But traders might use that opportunity to re-engage yuan longs on the back of improved trade talk sentiment. Mainly, Mnuchin’s critical inference to the “artificial” deadline; this offers up a higher probability that the December 15 tariffs will be deferred.
This view should also buttress ASEAN currency sentiment.
Price action alone suggests the markets are effectively pricing in a 75% chance of a delay in duty and maybe a 25% chance of a tariff reversal. So, there is still considerable room for the yuan to rally if the September rollback is put into effect, based on the above assumptions.
View from the street
But frankly if pressed for a cross-asset view, there’s a standard feeling on the street that's building around year-end de-risking and profit-taking. Mind you I find this a bit surprising in the wake of the robust U.S. jobs data, but even on that front, common sense seems to prevail, and traders are opting not to chase a possible one-off blockbuster report.
I think this is a function of the time of year where traders are looking to pare not add risk so they could be more prone to book profits on risk upticks.
All the while trade headlines and bond yields continue to act as the primary rudders for global risk and asset rotation.
Asia Open
Nothing like a blockbuster NFP to send the bears scurrying
Equities were stronger Friday, S&P 500 up 0.9%, and U.S. 10-year Treasury yields rose 3bps to 1.84%. Despite a weak ADP read earlier in the week, U.S. payrolls for November were much stronger than expected, rising 266k with upward revisions. European stocks were also stronger. Gold fell 1%, oil rose 1.3%.
U.S. job gains roared back in November as unemployment matched a fresh half-century low and wages topped estimates, giving the Federal Reserve more reason to hold interest rates steady after three straight cuts. And it should add to policymakers' confidence that consumer spending will be able to toe the line amidst the soft patch in business investment.
While the Treasury sell-off did stall around 1.85% yield, but undoubtedly the strength of the jobs number is going to make people think twice about stepping up to the plate. Last week's NFP could support the notion that the world is looking for a near-term rebound in the U.S. and the global economy. Even if you don't believe that narrative while thinking, we are merely in the calm between two storms, its challenging to critique this NFP report in any other light than to describe it as excellent if not a total blockbuster. At a minimum, it will push back calls for Fed rate cuts further along the curve, but importantly for year-end sentiment, it could provide a significant buffer to get markets across the finish line.
China trade data
Drawing attention to the importance of the trade negotiations for both China and market sentiment, at the open the market is experiencing a bit of a hangover from the weekend release of China's sagging export data, which was a casualty again of the protracted trade war with the U.S. coming home to roost.
Trade talk calm
But supporting risk sentiment is the positive shift in the tides of trade war. U.S. Treasury Secretary Mnuchin continues to suggest the talks are on track, and the "artificial" deadline does not bind the U.S. While in a positive gesture, China's ministry of finance said it would waive import tariffs for some soybeans and pork shipments from the United States
So, the market continues to price in peak tariff and a probable rollback of the last tranche of tariffs imposed in September. However, traders then turn a blind eye to the U.S. passage of Hong Kong and Xinjiang bills, which could eventually lead to phase 2 purgatory.
UK Elections
After weeks of waiting and years in the making, this week will mark the third UK general election in the last five years. While not in the same league as Italian politics as far as frequency of elections, that's still the highest number of elections held in the UK over any five year period since the early 1970s. But the outcome will be the most significant economically and politically, inspiring the cleanest breaks between the past, present and future in the storied history of the United Kingdom.
FOMC
Friday's stellar employment report should add to policymakers' confidence that consumer spending will be able to hold the line amidst the soft patch in business investment. Thus, Chair Powell could reiterate his recent remarks, which indicate that the Committee sees policy in the right place barring a "material reassessment" to the outlook. In this light, we could also expect Powell echoes a similar view from October, that while the bar to cutting rates is high, the bar for hiking is even higher as prudence would suggest the FOMC fade the strength in the massive jobs report. After all, it's seldom wise to place too much emphasis on possible one-off noisy jobs reports especially when the data is subject to significant revisions.
Oil markets
Crude oil prices spiked on comments from the Saudi Oil minister clarifying how he interprets the commitments from members of OPEC to cut production. He states that with full compliance, the total production cut would be 2.1mn bbls, which is 900k more than the current agreement, and more than the original headline, which said the cuts would total 500k. This is made up of full compliance plus announced cuts plus a 400k bbl voluntary cut by the Saudis.
The news was perceived bullish for oil prices after the Saudi surprise. Saudi Arabia is trying to reset market expectations. Still, a little bit of fact-checking suggests the informal commitment counts to Saudi production at 9.75 million barrels per day, which is not much below average January-October 2019 output of 9.81 million barrels per day.
But it would appear the market is giving the new Saudi energy minister Abdulaziz bin Salman the benefit of the doubt that he will be able to improve compliance, particularly from Iraq and Russia. At this week's open, oil remains supported by the trifecta of positives, a blockbuster NFP given rise to the global reflation trade, trade talk olive branches filling the headlines, and hopes for improved OPEC compliance.
Gold markets
Nonfarm payrolls rose 266,000 vs. a consensus 180,000 increase; U.S. job growth increased by the most in 10 months. The reaction in the financial markets was quick and robust.
The yields on the U.S. 10- year Treasury moved up to 1.86% from 1.79% previously, and the DXY Index moved up to 97.84 from 97.38 previously, and the e-minis galloped 30 points higher. All of which weighed on gold, but it was the frothy equity market that played the prime roll in undercutting gold prices.
The surge in equity markets is the most evident barometer of “risk-on” investor appetite, which throttled potential buyers in gold and prompted selling. In addition, some indications of progress on the trade front between China and the U.S. were also limiting gold upside ambitions before the data.
Expectations were a bit too tepid, and the final employment report of the decade was a blowout suggesting the U.S. economy is in good shape entering 2020
Gold is likely to stay on the defensive near-term.
It appears that employment growth may be holding up a bit more strongly than it previously appeared, which should have the effect of pushing out rate cut expectations further along the U.S. curve, and bearish for gold.
Trade issues have also shifted to more negative for gold. The U.S. administration said trade talks with China were “moving right along,” according to Reuters. And China continues to offer olive branches but reducing tariffs on U.S. agricultural imports.
Currency markets
The euro
While I gave up forecasting NFP decades ago, given that its a noisy data set open to constant revisions, but I'm 100% sure Friday's blockbuster number is outright dollar-positive versus the euro where the EU data continues to run wishy-washy.
The pound
PM Johnson’s mandate is clear as a bell: leave the EU in January. And he’s hoping that this week’s election will break the Parliamentary deadlock on Brexit. If polls are correct, PM Johnson’s gamble could pay off.
As things sit at the time of writing, the Tories hold a 10-15-point lead over Labour, which should translate into a resounding majority if the number holds up into election day. The reason why I say “IF" is that Theresa May had a similar lead with around a week to go, and we know how that story ended.
No two ways about it, early-week polls will be critical for sentiment, as it could give traders a heads-up if the numbers are trending in a similar direction to 2017. Last-minute sentiment swings could make this one of the most unpredictable events in some time, but it’s also without question one of the most critical events in the UK’s storied history.
The Malaysia ringgit
Friday was the second day of broadening EM Asia rally in FX. (MYR, CNH, SGD, IDR saw positive demand even the beleaguered KRW managed to stop the week-long bloodletting.
The ringgit remains supported by higher oil prices, a globally reflating economy, and definite trade talk overtones. However, the market could open on a more somber tone in the wake of China's trade data.