Risk Remains As Global Growth Slows, Currencies Pressured

Risk sentiment remains on the back foot as the volatile stock action continued in Asia and Europe overnight. And while the US markets ended a very jittery day lower, the losses were limited as the markets enter a stalemate period to rethink the plethora of looming market uncertainties, ambiguities and flat out worries in what was an untypically quiet New York session. But this relative calm belies the building storm clouds on the horizon.

The world economy is facing multiple complications, none more so than the reality that while US economy is settling into a stable growth trajectory, the rest of the world continues to wrestle with slower growth and currency pressures. Which raises the big question, how long can the anomalously robust US market hang on in the face of mounting global risks?

China Uncertainty

The most significant risk for Global Markets is neither a correction in US markets or the argument that US assets are overbought and need a ” shake out” as they are overbought for a reason. But instead, trade wars and China’s domestic financial polarity has taken a toll on both local and global economies, which has lost significant growth momentum. So far, the Pboc has resisted dipping into the cookie jar knowing that short-term monetary policy adjustment could worsen rather than improve conditions as this could lead to yuan instability. While the renminbi’s depreciation has arguably offset some of the negative from the tariff impact, further currency depreciation or even using it as a competitive tool could set off intense waves of capital outflow—which could lead to a currency depreciation spiral. A consequence that should make global capital markets tremble.

Rock and a Hard Place

Most developed countries are not much better off due to the plethora of debt on their balance sheets while still running in a historically low-interest rate environment. It’s not like they have any room to stimulate the economy. And while this slowdown in global growth momentum could be little more than a bump in the road in the expansionary cycle given trade and geopolitical concerns, the big problem is those concerns around Brexit unknowns; German Chancellor Merkel’s political losses in regional elections; US-Saudi relations and of course US-China tension, are showing few signs of easing. And with Citibank’s Economic Surprise Index for the US (CESI USD) back in negative territory, no wonder equity investors are doing a cut and run.

Oil Markets

The petroleum markets tested the upside as tensions flared over the disappearance of journalist Jamal Khashoggi, but have calmed down since Saudi Arabian Energy Minister Khalid Al-Falih assured that the kingdom would remain a reliable supplier to its customers.

However, there was no explicit mention of Saudi’s using oil as their "ace in the hole” bargaining chip against possible US sanctions, which would be like committing political suicide as far as US -Saudi relations, if not the rest of the world. Look no further than the reaction of the corporate worlds— hoards pulling out of next week’s Financial Conference in Riyadh, dubbed “Davos in the Desert.”

But West Texas Intermediate crude oil turned higher on Monday as the US Bureau of Safety, and Environmental Enforcement reported 198,622 bpd of crude oil production still offline due to Hurricane Michael, bringing total production losses to over 3.5 million barrels per day.

While Brent Crude is finding further support from the latest round of observed crude and condensate export data for Iran, which showed the country’s exports fell even further during the first half of October.

But we’re squarely back to the case of competing narratives where the oil market is “adequately supplied for now,” but the supply losses from Venezuela and Iran leave the market suffering from “strain,” according to a new report from the International Energy Agency (IEA).

But with geopolitical embers glowing, threatening to ignite the Middle East powder keg, and with traders all too aware that we are little more than one supply disruption away from tipping the fragile oil market supply and demand apple cart, oil prices remain firmly supported in early Asia trade.

The spare production capacity argument should continue to support oil over the short term. The IEA pegged additional capacity at around 2 million barrels per day. But the markets know these reserves have never been tested raising the questing how much extra capacity can be brought online immediately But, in the meantime, until additional supplies are made available, that crimp in quantity should be enough to support oil prices until proven otherwise.

Gold Markets

The Gold Rush has cooled off a bit but with the USD and global equity market looking increasing fragile, dips will be supported. While much of yesterday’s prices action was triggered on the unwinding of last week's short positions, and with traders now eyeing the critical 100 day MA at $1239, it suggests a push higher on any hint of equity market weakness.

Malaysian Ringgit

The ringgit continues to trade defensively ahead of the budget, but there were few EM specific currency developments Monday.

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