Asia Wrap
The market has turned risk agnostic until there’s clarity on how China would retaliate
With US President Trump signing the Hong Kong bill, Treasuries traded up to 129-15+ from 129-11+ while e-minis dropped 11 points to 3144 from 3155, which provided the highlight on a relatively quiet day.
It looks like spec positioning had already trimmed down due to the holiday-shortened week probably ahead of this expected event or defending against any other untoward trade headlines, so the market reaction was tame.
The HK bill headlines sent USD/CNH almost 200 pips higher to 7.03. The pair later retraced a bit and consolidated around 7.0250 for the rest of the Asia morning. Swaps traded firm this morning, with good year-end funding demand as the year-end is nigh.
Both AUD/USD and NZD/USD dropped 20 pips after US President Trump signed a bill. NZD/USD then rebounded on the back of the stronger-than-expected New Zealand business activity data. But the Aussie remains lethargic after the quick pop in volatility stalled as sellers quickly returned.
USD/JPY front-end vols also had a quick pop on risk aversion early on even though there’s little new information out on the US-Hong Kong bill. And for now, the market has turned risk agnostic until there’s clarity on how China would retaliate
EUR/USD 1m vols is trading at 3.95 - its first time on a three handle - while 1y remains at an all-time low of 5.45 as the market is looking to sell risk premium over the holidays.
The problem for risk is that in these holiday-thinned conditions, the smallest negative impulse can elicit an outsized reaction due to reduced liquidity. But since that’s pretty much a given around trading desks, I would expect interbank types to remain neutral while the news reading algorithms that never sleep can hopefully run roughshod over one another and knock each other out.
Oil prices
Oil prices are dealing with a double whammy of negatives this morning, a touch of demand devastation via the inventory data, which is getting exacerbated trade deal uncertainty.
Indeed, there’s a lot of trade talk euphoria priced into the oil market, so some of that froth is leaking out this morning.
But this is not the only concern as the OPEC meeting looms large. And with the recent comments from Russian Energy Minister Alexander Novak stirring the pot that the December OPEC+ meeting will have a “standard agenda.” sentiment doesn't look completely settled on that front either. Of course, his comments are open to a wide array of interpretations, but they don’t strike a resoundingly bullish chord that's for sure.
Unforeseen headlines risk, dwindling liquidity, and the fact every little bearish inference starts to get magnified three folds when viewed through the negative lens of trade war uncertainty suggest prudence is the best course of action when it comes to oil market risk ahead of the weekend.
Gold prices
Another day another apparent lifeline for gold markets, I wonder how many lives are left. But unless China calls off the trade talks or annoys Trump by trying to negotiate more sweetener into Phase one, its all about next week’s US economic data. So, with all the data that matters before Christmas getting released next week, especially the US ISM and NFP, it could be a telltale week for gold markets heading into year-end.
Media highlights
Some investors are concerned about the significant weighting apportioned to Chinese stocks within global equity indexes following the latest round of re-balancing. Pretty valid concerns given the negative economic outlook with the PBoC drip-feed policy stimulus unlikely to be adequate to bolster the slide
Put adding some level of policy support while speaking at a cabinet meeting on Wednesday, China’s Premier Li said the government wants to push on with reforms as well as cut taxes to help stimulate the slowing economy
Staying with my USMCA themed Thanksgiving celebration. The US administration is pushing hard to get the US-Mexico-Canada (USMCA) trade deal through Congress before the end of the year, which suggests present Trump is in a deal-making kind of mood. The White House is negotiating modifications to the deal with Democrats and is simultaneously in talks with Mexican and Canadian officials, according to the report. Democratic US House Leader Pelosi said earlier this week that an agreement is “within range”.