Asia markets
The PBoC has so far been reluctant to open the monetary taps to a large-scale easing program as concerns over the soaring CPI and a rising macro leverage ratio remain significant issues. The markets quickly read through today's more substantial than expected MLF as late-year measures to cover any year-end systematic cash demands while making adequate provision for the front-loading of special government bonds.
USD/CNH bounced off the overnight low and was trading firm into the London open. These seemed to be tactical position adjustments heading into the weekend to guard against headline risk.
While trade negotiations appear to be moving forward harmoniously, the unpredictable Trump factor remains a considerable concern.
But with trade talk calm filling the air today amid the latest favorable trade-related comments from Trump and Mnuchin, equity indices are mostly on the ups. But we know how quickly that can change.
Mood Music
But turning up the volume on the positive mood music, Xinhua reports that China will implement tariff waivers for some purchases of soybeans and pork. There was a definite bounce in risk sentiment on the headline as gold did its customary flop on positive trade news while USD/CNH is a bit lower.
Sure, the headline is excellent, but it's absent the main detail, how much are the exemptions? It's getting difficult to tell how much of this is move is related to HFT news reading algorithms or actual investor demand. As such until absolute details are produced there doesn't appear to be to much interest from the market to run with this headline currently
The Pound
GBP/USD price action remains constructive. The Pound has held onto recent gains well, with marginal pullback thus far. The markets have stuck to the bid on dip mantra, but a degree of caution might be warranted today.
End of week momentum exhaustion ahead US payrolls and a chance of PM Johnson misstep in tonight's debate could trigger some position adjustments into the weekend.
OPEC
The OPEC meeting taking place today will likely be the primary driver of oil prices, with commentary and speculation likely swaying sentiment before the official press release. The focus will be on the magnitude of cuts (hold or deepen) and how leadership (particularly the new Saudi energy minister Abdulaziz bin Salman, who is attending his first meeting in this role) improves compliance, mainly from Iraq and Russia
Interesting straw poll survey kicking around among local Asia oil traders which see 66 % of the street expecting $ 61 to trade on Brent before $ 66.
Game planning today is a bit tricky especially with the outside chance two dominant narratives could possibly complement one another. Ultimately if we get a definite roll back tariff headline coupled with a more profound response from OPEC than expected, the sky’s the limit so perhaps the markets could trade into that bullish storyline.
My initial strategy was to reverse on the OPEC bounce but it might not be such a faders delight with trade optimism back in the headlines
Gold
Gold will continue to get knocked around by the trade headline. So, trading has become a function of the fastest trigger in town and wholly driven by trade talk headline risk.
But economic data counts and the focus has shifted to tonight’s NFP.
Although the Feds will remain on hold next week the headline data will significantly impact the tone of the meeting statement language and Fed Chair Powell’s press conference and could set the timbre for Fed policy outlook into 2020.
Main views:
Asia Open
Agricultural Import Quotas: That All-Too Familiar Stumbling Block
The ongoing US-China trade spate looks set to ensure it won’t be a quiet end of the year for investors. This week’s US House passing of the Xinjiang Bill has done little to calm tensions. And with the latest spin of the trade deal wheel of fortune landing us back on that all too familiar stumbling block where Trump is demanding China provide a quantitative target for farm purchases, a critical piece of the trade talk jigsaw puzzle to pave the way for a rollback in tariffs is still missing. It’s not clear then that the probability adjusted risk-reward has gone up in any meaningful way this week. But does it matter to a market that wants to see the good in everything?
For now, if trade discussions seem to be moving in the right direction, hope remains alive that the Trump administration won’t move forward with a possible deal ending tariff hike on Chinese goods scheduled for December 15, and that seems to be glossing things over.
Treasury Secretary Mnuchin had remarked in late June about being “90 percent of the way there” with a deal. The last mile has proven to be more of a marathon that finds us continually returning to that same quantitative sticking point.
Beijing is not entirely enamored to lock themselves into such a considerable import quota nearly twice their previous level of agricultural imports. Committing to a quantified target leaves China open to enforcement mechanism reprisal if they can not comply for whatever reason, even if a valid one around the domestic containment of swine flu. So, this is something that needs to get ironed out, and while certainly not a bridge too far, it remains a source of contention and a major sticking point.
The prospect of a US-China trade deal remains the main factor sustaining the equity market rally. Still, investors are forced to keep pace with the rapid shifts in the US-China Phase One deal. They are attempting to make sense of the many comments – official and press ‘sources’ – on whether we’re closing in on a contract or not. But at the end of another week, we are no closer to signing a deal than last. Ultimately investors will remain hostage to the shifting “winds of trade war” in this extremely high stakes game of risk.
It has been a fraught end of the year with event risk aplenty; investors have turned profit protection mode with de-risking driving flows. Volumes suggest buying by systematic funds has dried up with the spike in volatility and a rise in cross-asset correlation. This means liquidity should begin to wane, and it’s only December 6. But the massive tail risk remains the US-China trade deal
US payrolls, the steer from the Fed, and the UK election result are the next critical macro events/risks. The significant risk for Forex markets is in GBP as the polls stabilize around a Conservative majority.
NFP
At the October 30 FOMC meeting, Fed Chair Powell indicated that policy is now in a good place barring a “material reassessment” of the outlook. While the market lean is for the Fed to remain on hold next week, should the November employment headline report significantly disappoint like the ADP survey, it could impact the tone of the meeting statement language and Fed Chair Powell’s press conference.
One sure thing, policymakers will do a deep dig into October and November employment data to determine the underlying trend due to the General Motors (NYSE:GM) strike. However, just as last month, the direction of revisions may prove valuable concerning how the FOMC views the recent job gains in next week’s meeting statement.
Indeed, considering the sizeable miss on November private employment, most shops have adjusted their headline forecast lower. Don’t ever forget that this game is not about predicting what will happen in an absolute sense, but what will happen versus what is priced into the narrative while keeping in mind these lower revisions are in the price.
Oil Markets
The dueling headline narratives, OPEC meeting, and Trade Talks captured the imagination, both good and bad, of oil traders overnight.
There have been reports in the press about deeper cuts within OPEC - but so far, OPEC has failed to strike a bullish chord failing to reach any compliance consensus. But traders are still awaiting “beautiful news” as the Saudi energy minister alluded to. But with 6 hours of discussions and no commitment, especially with WTI $50 per barrel staring members in the face, this points to a division in the ranks.
The flip in OPEC ( deeper cuts) is likely due to Saudi Arabia strong-arming and putting up a show of force, making it abundantly clear to other OPEC+ participants that it is no longer willing to shoulder the burden of supporting oil prices when others wantonly disregard compliance commitments.
But here is the problem, of course, members will agree, but without a punitive compliance mechanism, will they comply.
Multiple countries are cheating on quotas -- so adherence to the cuts is unlikely, and even if states do comply, will it be a long-term practical solution or little more than a band-aid on a broken leg type of fix.
All the while, trade talk uncertainty over China’s US-imposed obligation to import a staggering 40 billion in US agricultural products remains a significant obstacle to tariff rollbacks.
Oil is likely to be supported through Aramco IPO (trades December 11) and then be careful.
There is nothing altruistic about Saudi Arabia’s current stance on oil prices. It’s about setting the oil price standard as high as possible into the ARAMCO IPO. Then all bets are off on bullish oil aspirations, especially with an iffy trade deal hanging ominously like an anvil overhead.
Gold Markets
Gold short-term speculators were caught wrong-footed overnight, building long positions in anticipation of a weaker NFP but ran into a jobless surprise. The initial weekly jobless claims decreased to 203,000 in the week to Saturday, beating market expectations and marking a seven-month low.
Yesterday US data dump came in broadly in line with expectation. Durable Goods was the final print anyway, revised a little lower but nothing that is going to cause alarm, certainly not to a market that wants to see everything through a rose-colored lens.
Encouraging for gold bulls, however, is that unlike price action last week, gold is consolidating towards the high end of the recent range heading into the weekend. Which makes absolute sense in this current environment where uncertainty is high, and rates are low. But even more so with equity markets precariously perched near all-time highs, which makes gold a perfect hedge against a possible steep decline in global equity markets into year-end. Indeed, the year-end tides of change in the equity markets are on the rise, which is mostly down to extreme valuations, and that year-end view is compounded by trade talk risk.
G-10 Currencies
The Euro
The EUR/USD has found itself in a state of view neutrality at current levels. A bit of theme was emerging this week on the fundamental front. European PMI data mixed, but overall, it was marginally positive while on the other side of the pond, data remained weak with ISM non-manufacturing falling below consensus. However, last night’s jobless claims and US data dump threw a bit of a spanner into the works on that theory. So traders sit tight, waiting for the outcome of the crucial NFP. If pressed for a view, the market appears more bullish than not with orders layered down to 1.1060 and stops around 1.1020, suggesting a critical pivot point down below.
The Pound
Cable continues to move well as traders are more optimistic about the prospects of a Tory majority and nudged along by some underweight UK equity flows intermittently coming to market, which continues to drive the price action.
Japanese Yen
Headlines still drive the bus. It looks like the yen's bid tone is back, but even though the more favorable trade tone suggests going long, most G-10 traders are just as happy to get involved on the extremes.
RBNZ announced the new bank capital buffers earlier, with a phase-in period over seven years. The longer duration than the previously expected five years was taken positively by the market, which had feared that a shorter implementation period would force the RBNZ to remain in an eternal dovish stance. However, the technical indicators are looking a bit scary with the market overbought, so the market may need to shed some excess baggage before moving higher again.
ASEAN FX
On the never-ending trade talk yo-yo narrative, interest has flipped to play USD/CNH downside on the latest trade headlines. The rest of Asia sees to be riding on the same boat, and even this week, beleaguered Korean Won has improved as KOSPI carnage has abated.
The Ringgit
The Ringgit has remained supported overnight on the improving prospect of a December 15 tariff deferral as trade talks move forward harmoniously. The global bottoming in economic data is helping buttress regional sentiment, especially the latest bounce the China PMI readings. Add in the OPEC compliance inspired rebound in oil prices and the Ringgit finds itself in a much friendlier place to end the week.