Buy All Dips? NK's Aggressive Stance Could Signal Power Shift

Market volumes have been noticeably low today, as I suspect traders have been tethered to the headline swivel. If you are not currently in the game, it was hard to make a case to do anything, as stocks were hardly on a big enough fire-sale to skew the risk-reward reversion play enough to open up new positions. At the same time, it continues to prove hard to short the markets outside of a few overcooked COVID-19 headlines. On the G-10 currency markets, meanwhile, everyone was waiting for London liquidity to show up before making any big moves

The USD dollar was small bid most of Asia, but despite the dollar negative-correlation decoupling from stocks, I still think equity markets will dictate the next move for the buck. And I do not expect the dollar rally to stick. As such, traders could start to favor currencies of economies that are emerging from the COVID-19 crisis sooner, such as AUD, NZD, and the KRW, eventually should look good.

On Tuesday, price action seemed mostly driven by a considerable EUR selling orders going through the market, rather than any fundamental reason to sell the EUR/USD that aggressively explicitly.

Apart from the India-China border conflict, broader risk aversion in FX markets would probably come from mounting coronavirus cases in Beijing. But even on that front, most traders realize that second major economic lockdowns appear highly unlikely, given the financial damage from the first.

USD/CNH is following the broader USD moves while USD/KRW is on the rise, as South Korean officials sound aggressive in response to North Korean actions, the latter will pay if it takes military action. However, the market fully expects there to be some frantic diplomatic action at home, and abroad, to ease the situation.

Ultimately, however, any stock market weakness, failing a full-out border escalation in either geopolitical flashpoint, or super-spreader in China, could prove to be another opportunity to buy the dip. As the turnaround in market sentiment of late has been particularly striking, most have begun without any real catalyst, just a wall of money hitting the market en masse.

European equities are up 0.7%. The elevated futures/cash ratio in Europe and the risk-on moves in other asset classes suggest the buying could be systematic. That said, the tape is resilient, with dips clearly bought and positive headlines/news flow causing sharp moves higher in futures. Likewise for US equity futures, which remain resilient on the back of liquidity supportive comments from Chair Powell, strong retail sales figures, and President Trump's infrastructure plan. This suggests infrastructure baskets could remain supported. Energy could bounce back a bit, as OPEC compliance and a less pessimistic outlook from the IEA continue to resonate on oil markets today.

However KRW and KOSPI traders may stay on the sidelines a bit longer. North Korea's aggressive stance could be a foreshadow of a power transfer to the sister of leader Kim Jong Un, saying over the weekend that the inter-relationship office would be demolished. We may see more of the same shortly as she tries to stabilize her power.

And what could ultimately be the new normal for holidaymakers - almost 70% of Beijing's flights were canceled on Tuesday, according to state media. While 1,255 flights had been canceled as of 9 am Beijing time, Macau imposed a 14-day quarantine on arrivals from the city. So, plan upcoming holiday trips wisely.

Suitable for oil prices, but horrible for the industry, shale drillers are finding themselves cut off from funding, as banks begin to reduce credit lines. Moody's and JPM estimate a total reduction of up to 30% of asset-backed loans. The loans are not deemed significant enough to cause any systemic risk to banks, but many could suffer sizeable losses and are currently trying to offload some of those loan portfolios. According to regulatory filings, more than two dozen producers have had their borrowing cut.

And like most cross-assets traders, oil speculators have quickly come to realize there will be no significant lockdowns, so oil remains bid on dips.

I am not sure this will be a game-changer for the ringgit, as the market has become desensitized by the political bluster of late.

Nikkei reports that Malaysian PM Muhyiddin Yassin is considering a snap general election. It said that government sources say he wants to "straighten the messy political scene." The Alliance of Hope, of which Muhyiddin is part, toppled the National Front coalition three years ago after 63 years in power. Currently, the government has a majority of just four, and there is still another three years to run before an election is due.