Positivity Prevails, Relief Rally Ensues

Global capital markets stayed in a positive mood overnight, but investors remain on guard for any escalations in geopolitical tensions while trade tariffs remain bubbling under the surface. On the latter view, the latest headline scrolling across the ” terminal” * THE US IS SAID MULLING NEW ACTION AGAINST CHINA’S TECH LIMITS: WSJ.* As usual, any headline development in this market is worth keeping an eye on.

In the meantime, investors are breathing a sigh of relief that their portfolios survived the weekend as geopolitical tensions have not escalated following the weekend’s military action in Syria. Indeed a bit of a relief rally has ensued giving investors more wiggle to focus on the critical task at hand, first-quarter earnings season.

The markets didn’t dodge a bullet so far this month but have eluded a double barrel cannon in the form of trade wars and middle east military escalation.

Turning to the day ahead, the initial focus will be on China’s data dump and specifically the Q1 GDP report. According to Bloomberg, the consensus expects growth to have remained steady at 6.8% yoy. Its interesting given the robust GDP calls that China’s economy is showing little wear and tear from trade tension nor deleveraging.

Oil Markets

The easing of tensions in the Middle East between Russia and the US saw oil prices continue to slide overnight. President Trump even walked back supposed planned sanctions against Russia over Syria.

While Syria in itself is not a significant player in the oil supply chain, still a sense of relief has set in that the US-led airstrikes on Syria didn’t trigger a broader response from Russia which could potentially have sent the region into chaos and introduced many more players into the escalation matrix.

But today is a new day and with so many potential supply disruptors in play and few signs that the current market upheaval will end any time soon, traders continue to pay the geopolitical risk premium. So oil prices should remain bid on the dip at least through the Iran nuclear deal deadline (May 12) if not for the remainder of 2018.

Gold Markets

After bulking up on gold hedges ahead of the weekend, paid-in premiums continued to gradually unwind as investors are back gingerly testing the global equity market waters again. But with investors focusing on positive trade headlines and Syria de-escalation the markets is only a headline away from reigniting the Middle East powder keg. Few safe havens offer the safety and appeal gold has in this highly disruptive market and despite a quieting of negative headlines overnight, its unlikely we’ve seen the last of China trade tension or a weaker US dollar for that fact. All of which continues to provide the most apparent reasons to own gold.

Currency Markets

The British Pound

The sterling bulls are charging ahead of the crucial UK wages data which is anticipated to come in strong. With positive vibes from the Brexit negotiations suggesting more hawkish policy room for the BOE, a robust wages data will provide the boost to May rate hike expectations and will underpin GBP sentiment.

The Euro

Outside of the pound, G-10 currency markets feel very dispassionate. Neither US CPI nor FOMC minutes had a lasting impact on the market last week; the latter considered dated after Fed Chief Powell's somewhat dovish signals last Friday. The euro is running hot on ECB speakers playing down the dovish turn on the economic data, but it’s difficult to see the EURUSD moving out of its well-trodden near term ranges anytime before the ECB sets the tone at the next policy meeting April 26.

The Japanese Yen

The yen market looks very heavy moving towards 107 but with US yields and global equity markets on the ups there's little incentive to push lower at this stage. “Abexit” continues to weigh on local sentiment, which could be the eventual trigger to move below 106.75, but in the meantime, the market is doing little more than biding time until the next headline risk.

But with so much risk permeating the markets, there’s still substantial support for long JPY.

The Malaysian Ringgit

Local traders think GE14 can’t get here quick enough. Election risk is not something unique to Malaysia, but unlike some of the recent surprising election results in the UK or the US, its highly unlikely Malaysia's current ruling party will get upended.

Nonetheless, that slight chance is keeping Malaysian bond buyers on hold. So with the Malaysia bond market expected to remain quiet ahead of the election, currency markets will remain equally silent and will continue to trade with a defensive posture ahead of the polls.

The market was positioning for a stronger MYR into the election, so with a base forming around 3.87, the logical move it to reduce shorts and wait for the better level to re-engage long MYR positions. So we should expect the USDMYR to trade within and continue to revert to the upper levels of the current ranges.

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