Asia Wrap
There was a pretty broad-based rally in equity markets after having recovered from some bearish trade headlines earlier in the US session.
The market is looking through the headline “ping ping” in favor that some limited trade deal as imminent. There was some divergence between equities and other risky assets, notably commodities, which is probably due to the uncertainty over the degree of tariff rollbacks.
RBA minutes
Australian rates rallied intraday on the RBA’s November meeting minutes, which noted that a case could be made to ease monetary policy at that meeting. There was a strong hint of dove in the November minutes, with the board saying a “case could be made” for a rate cut. Comments partly offset this that they were waiting to see the impact of previous cuts.
Since then, however, Australian data has deteriorated, with employment growth running below the RBA’s forecasts, unemployment picking up, and inflation expectations still stuck near record lows. So the market continues to expect another 50 basis point sin cuts. Stil the Aussie hasn’t exactly fallen off the cliff and remains supported by the bounce in equity markets on optimism that some form of a trade deal will eventually get tabled.
Oil
This weekend’s optimism on US-China trade talks reversed over concerns on the Chinese side about President Trump’s willingness to roll back existing tariffs, a Chinese prerequisite for the signing of an agreement. The news initially weighed on broader markets, and oil was particularly hard hit with a 2.6% peak-to-trough drop in Brent yesterday.
In the case of oil markets, it’s abundantly clear that oil traders view a trade deal without a tariff rollback as meaningless and will provide the minimal economic punch.
In the near-term, however, the US-China trade and the upcoming OPEC meeting will set the tone for oil prices. The market seems reasonably confident that OPEC will do whatever is necessary to produce a supportive outcome, but as for a trade deal with a tariff rollback, that remains a bit of a coin toss.
Currency Markets
The Yen
USD/JPY is still trading at very well worn ranges s. Offers around the 200dma of 109.00 got tested again yesterday but held test the support area at 108.50. With little follow through on the downside, so for the time being, the range play is intact.
The Euro
The Euro remains bid as a much cheaper and less risky proxy to a favorable Brexit deal. The strength in sterling on the back of more positive polls for the conservatives and hence a quicker solution for a Brexit deal supports the Euro. Also EU equity market continues to see strong inflows, given that it’s one of the most leveraged ways to play a bottoming in global PMIs. Besides, the market is pricing in a favorable response for the new ECB President Lagarde’s first public speech on Friday.
The Ringgit
The Ringgit is trading a bit weaker coat-tailing the Yuan sell-off as uncertainty over the US-China trade deal is clouding ASEAN currency optimism. Also, political unease has ratcheted higher after Malaysia ruling Pakatan Harapan suffered an election set back losing a seat in the vital by-election in Tanjung Piai. Indeed this should provide a bit of a wake-up call to government leaders.
Bonds
Markets are trading in a narrow range suggest Investors are either happy with their positions or content to sit on the sidelines and see how the next few weeks play out in terms of a US-China trade deal and the UK election. The recent rally in fixed income hasn’t been enough to change the technical landscape to any significant degree, and bonds are still trading poorly. Rallies are shallow, and fixed income continues to discount issues that would have pushed the market higher only a month ago.
Gold
Rallies remain shallow as gold traders still think a trade deal will happen. However, gold remains supported by the fact a comprehensive trade deal, one which would include tariffs rolls back and could shift more neutral the dovish central bank narrative, as unlikely. Again it’s all about rates as any credible gold investor will tell you.
Interesting read from UBS Evidence Lab Market Thinking Game as institutional investors were asked for their opinion on how their peers might be thinking about gold, identifying what the most critical issues are and how these stack up against each other. Not too surprisingly, from a gold traders perspective, Fed policy is the number one driver for gold sentiment, the US dollar number two while trade war comes in third. But of course, Fed policy has been driven by the protracted trade war narrative in no small degree. Still, a Fed pause( bearish for gold) is hardly endearing the gold bulls that, for the most part, are either happy with their current positions or remain sidelined until the US-China trade deal is signed.
Fed Speak
Yesterday’s Fed speakers underlined why the market is targeting a period of Fed inaction. Boston Fed President Rosengren warned of the risks to financial stability if the Fed continued to pursue its 2% inflation target. He said he would rather than inflation was higher, but he didn’t think there was much cost to it being a little bit below 2%
Cleveland Fed President Mester also thinks the economy is in the right spot, with inflation moving closer to target and the consumer remaining steadfast and resilient. She said, “now basically we’re on hold,” and she would have preferred to have left rates unchanged at the previous meeting. Mester becomes a voter next year.