By Stephen Innes
UK political drama will continue to rock and roil markets, while the emergence of a distinctly dovish tone from the Fed knocked the USD off its pedestal going into week’s end. The week ahead will be cut short by the Thanksgiving holiday in the US. And while this adds up to less trading days, those fewer hours will be chock-full of political drama, while a drop in liquidity density will add to the chop. For no other reason than year-end self-preservation, the market’s risk profile will continue to drop as political risk continues to permeate virtually every pocket of the globe. As such, traders will be in risk reduction mode, suggesting a high level of indifference will creep into the playing field as year-end musings leak into the equation. And without question, traders and Fed watchers will take a keener interest in upcoming financial reports to flesh out any indications of a US economic reversal.
A pause in US interest rates could offer a reprieve to equity investors. However, when the Federal Reserve shift course, it should send out early warning signals that something is amiss with their economic projections. A Fed pause during a hiking cycle is a very strong “canary in a coal mine” type of signal and could eventually lead a more profound correction lower in US equity markets if the US economy does sputter.
Market banter around US President Trump and Chinese Premier Xi’s G20 meeting will ratchet up several decibels this week. Frankly, my sceptical radar is flashing red, as we’re unlikely to see concrete progress from the one-on-one talk. Presidents Trump’s pep talk on Friday: “I think will have a great relationship with China.” Furthermore, China would like to make a deal and has sent a list of things it’s willing to do on trade. While the list is “pretty complete,” four or five things have been left off. Still, the US “may not have to impose further tariffs on China,” which firmed the G-10 commodity block of currencies and the EM gamut.
At the APEC summit on Papua New Guinea, the US and China were back swapping brickbat. Taking a direct shot at China’s global expansion ambitions, Vice President Pence said: “We do not offer constricting belt or one road,” referring to China’s Belt and Road initiative, while directly criticising China for offering up loans to countries that cannot possibly service the debt. This view seemed to be echoed by both Australia and Japan, which will join the US in partnering to help struggling countries build infrastructure. If the week’s talks are a preamble of where we’re heading for the Trump-Xi meeting, things could turn sideways quickly, as the US is taking a multi-pronged approach to China, which is not only focusing on trade but is also now warning countries about China’s global expansionary ambitions. But the coup de grace from Pence was, “America will not change course until China changes its ways.” Indeed, a cacophony of deafening alarm bells suggests these two distinctly differing ideologies remain miles apart.
On the US domestic front, the USMCA deal or the Mueller investigation will likely add a bit of spice to the mix. Trump is not agitated about the Special Counsel. He says he’s finished writing his answers to Mueller, but hasn’t submitted them yet. And look for the White House revolving door to starting spinning again, as the President is happy with “almost all” of the White House cabinet.
Oil in focus
Oil traders remain intently focused on support levels into the month end and OPEC headlines.
Oil prices rose on Friday on hope that OPEC and partners will act to reverse bearish sentiment, but from a technical set-up the bear mode remains intact, with the downside WTI target falling between the $52-54 levels. Hedge funds’ ratio of long-to-short positions in the six major petroleum contracts fell to 3.09:1 on November 13, the lowest since July 2017, and down from the recent high of 12.44 on September 25 (Reuters).
However, on the back of OPEC indicating that they are considering even more substantial production cuts to counteract fading global demand, and coupled with WTI spreads trying to spring back to life, the prompt price curves have remain relatively flat, and there’s a growing sense that the markets are shifting back into a more neutral tack. Indeed, prices may have dropped sufficiently enough, and while allowing of global growth, could weigh on global demand and dent bullish sentiment. Still, the International Energy Agency suggests global demand will continue to grow at 1.4 million bpd in 2019 (compared to 1.3 million bpd in 2018). However, ultimately, the markets’ bullish radar is still waiting for OPEC+ to deliver a sizeable cut number with a commencement time attached before aggressively jumping back into the fray.
(From Reuters Global Oil Forum)
Oil rigs +2 to 888 (+150y/y)
Gas rigs -1 to 194
Oil & Gas by Basin
Permian +1 Eagle Ford +3 Williston unch
Niobrara unch Haynesville unch Utica -2
Oil, the week that was
The EIA showed crude stocks in the U.S. building by +10.27 million bbls (versus APIs +8.8 million), primarily led by stock increases at the Gulf Coast, as runs in the region were lower by -267k bpd w/w. Lower imports could not thwart overall builds, as exports were notably lower last week (by -355k bpd). Stocks at Cushing were higher by +1.17 million bbls, as the pace of builds at the hub slowed, with higher refinery demand helping to thwart increased inflows with Sunrise ramping up.
Spurred on by the weaker dollar, gold continues to glitter as investors flock to safe haven assets, driven by uncertainty in the UK and the ongoing US-China trade war. With the Fed taking a dovish U-turn, this shift could provide a strong underbelly of support for gold prices into year end.
Palladium hit an all-time high this week as projected Chinese auto industry demand will outstrip supply in what Citigroup Inc. calls “extreme tightness” in supplies. Keep in mind, this is all part and parcel of China’s green policy, and the country’s new auto emissions standards are likely to boost demand. While this many sounds counterintuitive with both China and US car sales falling, however, talks of a 50% tax cut on cars in China could revive the sagging markets. The big question is whether we will see palladium prices cross gold or whether speculators jump onto the wagon. So far, this rally has been driven by industrial demand, while speculators are reluctant to jump back into the mix given the rise in electric cars which do not need catalytic converters, which account for around 75% of palladium demand.
The USD failed miserably last week, and it’s unlikely the market will be soft-hearted on the dollar bulls heading into year-end.
The de-escalation of trade war rhetoric on the back of China offering up trade concessions saw a swift reversal on USD safe haven hedges in EM Asia, particularly against the yuan. But the DXY hit the skids, falling from 96.90 towards 96.40 on a speech from Vice Chair Clarida, who, in a coordinated fashion and following in the footsteps of Chair Powell’s cautious tone from Wednesday, also emphasised global growth concerns. Which, in the market’s opinion, effectively walked back one of the more hawkish elements of Fed policy. This is far too coordinated, as the Fed is telegraphing hesitancy with Powell, Clarida, Evans and Kaplan raising concerns about 2019. If the Fed does raise interest rates in December, it could be a one and done for a while.
Fanning the dollar demise, both China and Japan, the two biggest foreign U.S. creditors, cut their U.S. Treasury holdings further in September. If US-China trade war continues to go sideways, it’s possible it could also reduce US bond holdings. While I’m keeping a close eye on future developments, at this stage of the game, I suspect this is just prudent policy to effectively acquire USD as part of an intervention smoothing procedure to prevent the yuan from weakening too quickly as the economy slows, which will trigger capital outflow. Given that China foreign exchange reserves have been declining, this makes sense to ensure reserves stay above the US 3 trillion mark.
EURUSD rallied to 1.1420/10 on broader USD, with the first sign of Fed hesitancy reducing the odds of a December rate hike, and as traders start to price in the reality of a Fed pause in 2019, we could see the euro push much higher into year’s end on any Tier I US economic wobble. In fact, I suspect the USD will be more reactive to weaker data than it will be to strong data, suggesting that skew is in play for the greenback given the market’s propensity to unwind long dollar risk into year’s end.
USDJPY ends the week back below 113.00 on the more widespread USD sentiment in what could be the beginning of a protracted move to 110 overlaid with a lower trajectory for US interest rates and shaky equity markets.
AUDUSD ended the week above 0.7300 after bouncing off decent support at .7175. The strong Australian jobs report, coupled with a rallying cry from President Trump on the trade war with China, has not only triggered a reversal on China proxy trade but is garnering a lot of attention from A$ bulls, as the AUD has been a direct beneficiary of the greenback’s demise globally. Last week’s beat on the domestic jobs report has an excellent vibe about it, and coupled with a resurgent commodity market, the outlook looks much rosier for the Australian dollar, but the omnipresent US-China spat has a tendency to rear its ugly head as it did at the APEC summit. So, the AUDUSD to trading off last week’s closing highs but still trading above .7300 at the open.
GBPUSD ended the week on a slightly positive note as Brexit developments led to minor recovery for Sterling on Friday, but there is a considerable element of risk this week. The pound hovered in a 1.2800/80 range over the NY session but remains tentatively bid no dips. But it’s unlikely that the market’s long sterling position pain threshold will weather another deep dive into the low 1.2700s. So, it wouldn’t take much more of a spot decline to drive a deeper flushout in positions and a move below the 52-week low of 1.2662. But in reality, it is anyone’s guess where Cable settles, with Brexiteers reportedly trying to re-write the deal, and all the while, May’s future lies in the balance.
Trade war detente is picking building momentum, but with high expectations comes incredible disappointment, as the risk-reward appears to be shaded towards a letdown.
However, trading activity in the local currency markets has been decidedly mixed, with the North Asia underperforming South Asia where carry trades enjoyed a solid week on the back of lower oil prices and monetary policy tightening.
Regardless of improving trade war sentiment, current account depletion and policy divergence between the Fed and PBoC suggest USDCNH will continue to march higher in the months ahead. This indicates that dips will keep being favoured, even though Jay Powell walked back some of the more hawkish elements of Fed policy. I think the Fed is very much in the data-dependent camp and will raise in December, but the Fed’s early warning signals about an economic slowdown in 2019 does bring an element risk behind this view. However, unless there is a complete thawing in trade tension, a push higher to 7 USDCNH remains on the cards.
While the collapse in oil prices has benefited the INR, the long-term path of least resistance remains to skew higher, although the near-term view remains exceptionally cautious due to falling oil prices.
Malaysia has come out with a pair of weak Q3 figures: a below-potential GDP figure, and another dip in the current account surplus, which support a weaker glide path for the ringgit in the months ahead. Perhaps the only saving grace for the ringgit could be a large-scale improvement on global risk sentiment, which could support a local bond market rally and see an increase in foreign inflow.
Bitcoin advocates are asking how low will we go from here, as the world’s largest cryptocurrency continued to slump following its most significant one-day loss in eight months.
The digital token fell as much as 6.3 per cent to $5,202, having plunged through a critical resistance level on Wednesday after a period of relative tranquility. Many of Bitcoin’s closest peers also slid on Thursday, while Bitcoin Cash, which splits today into two coins, was down as much as 15 per cent.
I remain incredibly bearish on BTC, with as the $1000 level looking as likely as $10,000. But this is from a long-standing and unwavering view that regulators and the banking system will continue to push back against the rise of virtual markets and will undoubtedly burst crypto’s ballon, as the $5000 cliff edge is approaching fast.
But not too surprisingly, chipmakers tanked this week on a probable loss of demand as crypto mining collapses, which is sending out warning signal of trouble to come. These stocks act as good proxy exposure into Bitcoin, while avoiding the liquidity crunches associated with underlying crypto movements.