Spring Has Sprung And Hope 'Springs' Eternal

By Stephen Innes

Off to a slow start, as market participants slowly filter back after the holy junction of Easter and Passover.

Spring has sprung, and so have green shoot progress on the US/China trade front, but investors continue to struggle with the new normal of higher market volatility, and lower returns after the S&P 500 recorded its first quarterly losses since 2015. The debate over global trade continues to simmer, and the regulation of technology sectors amidst the Facebook (FB) security breach has steadily eroded investor sentiment.

The market's biggest fears about escalating trade war and higher US interest rates have tentatively blown over, suggesting investors will shift into bargain-hunting mode. However, unlike the start of the year, investors appear less concerned about fear of missing out and continue to be more worried about the fear of getting out. Investors have been riding overweight tech sector positions for just about ever, but tighter regulation in the tech sector suggests the so-called FAANG group of stock (Facebook, Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) (GOOGL)) are at a significant inflexion point. And while hope springs eternal for much of the tech sector in general, the industry behemoths could continue to be investors punching bags while libraries worth of regulatory oversight get ironed out.

The USD remains surprisingly unshakable despite the ongoing Muller investigation, a dovish start to Jay Powell tenure at the Fed, the revolving door at the Whitehouse and mushy wages. While the USD sell signals are less precise than traders' idle banter suggests, nonetheless there could be an early bias to re-engage USD shorts this week, as causality would indicate that the US dollar, in the absence of quarter end flow, would fall prey to exigent themes. Or at least until trader talk is walked. But getting less attention than it really should is the PCE price index, which showed a year-on-year uptick of 1.6 percent in February from 1.5 percent in January, which suggests the market's current three rate hike scenarios for this year could be looking a tad dovish on flickering inflation embers.

The IMF reported the US dollar share of global currency reserves has fallen to the lowest in 3 years. Not overly surprising, given the strength in the JPY this year has attracted a lot of attention from reserve managers. Not too unsurprising that traders are not alone in their longer-term view of the greenback. No one is especially eager to buy $ these days, including central banks.

Asian risk premiums continue to swing on the macrame of trade wars, tech losses and the Korean summits. But the inclusion of Chinese government bonds in the Bloomberg Barclays Global Aggregate Index is a significant coup. And with two more indexes inclusions expected this year, this will be a massive boost for capital inflows and provide anchors for the domestic market structure. Also, it will give a positive knock-on effect on regional sentiment as the RMB complex continues to steady the local ship.

Three-month LIBOR continues its assent, passing through higher funding costs, as institutional market participants borrow through a LIBOR facility. On Monday, the Federal Reserve Bank of New York begins publishing the SOFR. The Secured Overnight Financing Rate aims to be more reliable and less artificial. But keep in mind the new SOFR rate will only be applied to overnight funding transactions.

Oil Markets

The market will continue to digest signals from whether or not the US administration will scrap or maintain the fragile nuclear deal with Iran. So political headlines will remain essential in the absence of any market report from OPEC or IEA. The possible return or Iranian oil sanction will continue to drive near-term sentiment. Although US shale producers continue pumping out an eye-catching estimated 10.4 million barrels per day, the US massive export market that has grown from a small number of tankers to a burgeoning 7.7 million barrels of crude per day will continue to dry up inventories. So much so that even trader disappointment over US inventory builds and the new high in estimated crude production remains short-lived. As downward pressure remains on US inventories, oil prices will continue to stay hypersensitive to global supply disruptions.

Adding to the positive vibe, Baker Hughes (BHGE) reported its first fall in weekly rig count in three weeks.

Gold Markets

Gold traders will continue to take their cues from broader USD sentiment. Geopolitical risk premiums are slipping with Korea back in the headlines for all the right reasons: North and South Korea will host a historic summit on April 27, with both countries' leaders meeting face-to-face, and besides with the fear of full-blown global trade war receding, bullish geopolitical cues remain subtle. And while the frightening thoughts of an escalation of West-Russia tensions remained real, but given the tit-for-tat response from Russia so far, gold will be at the mercy of an oscillating dollar to start the week. Over the longer term, however, the burgeoning US debt will be met with fewer and fewer buyers, as we slide closer towards an inflationary storm. So with investors' trepidation likely to continue overwhelming markets, gold should remain in favour.

G-10 Currency Markets

We're at curious crossroads in currency markets, and last week's USD dollar demand will be of particular discussion as traders turn on their terminal to start the week. Prattle at the top of the cue is last week's merciless position squeeze on USDJPY, risk-off trade, Fed gradualism, surging LIBOR and flickering optimism on the inflation front after a sturdy PCE print. And while trade concerns loom, traders will be particularly happy for a return to basics as the diary is chock-full of tier one economic data to play off. But G-10 traders remain in desperate need of a wild card to put in play and perhaps this week's AHE report will see those cards pressed into duty. But bearish dollar views need to pay very close attention to the data front as Q2 could be pivotal in both US economic and Fed policy terms. And while it's unlikely the US dollar underwent something of a Damascene conversion last week, don't write off dollar just yet - last week was a surprisingly good one for the greenback.

Japanese Yen

How much of this squeeze has to do with quarter end/Japanese fiscal year-end flows remains to be seen. But the market has taken out some significant levels on its way to the most extended USDJPY rally of the year. Of course, with "risk-off" abound, the temptation is to fade the extremes with 108 widely subscribed as the long-term short dollar KO zone.

The Euro

The EURO remains sidelined at the moment, at the mercy of broader USD moves. And while an April ECB policy shift is far too early even to consider, traders continue to view the June meeting as the big shifter. In the meantime, markets remain guardedly long EUR, given the skewed propensity for a negative tail risk surprise from both US economic data and US politics. But that could change swiftly.

The Australian Dollar

The Aussie will get absolutely no help from the RBA meeting, where no change is widely expected and for the RBA to maintain its neutral bias. RBA guidance remains exceptionally consistent; the economy is doing well, they need to stay patient for wage growth to kick in before shifting policy rates.

$Asian X Japan Currency Markets

Investors are realizing that regional currencies could experience a hawkish shift as the North Korean political olive branch continues to suggest an easing of risk in the peninsula, while the US and South Korea agree on KORUS amendments. But the rush is on to avoid the US designation as a currency manipulator as Seoul will soon go public with foreign exchange market interventions.

But in general, regional traders remain focused on trade tension, but with the US administration on the charge about "currency manipulation" again, it suggests that a weaker US dollar will be a by-product of policy rather than the fall guy stooge. With the US administration connecting regional currency policy to trade, it is thought that this would limit regional central banks' ability to intervene in currency markets, so traders continued to sell dollar against the local basket last week. But with Tech sector headed for regulatory clampdowns, the regional fall-out remains a bit of a mystery. So regional equity market inflows and risk sentiment will remain fickle.

Growth in China manufacturing sector registered higher than expected in March as steel mills and an easing of trade fears continue to drive sentiment. The official Purchasing Managers' Index (PMI) released on Saturday rose to 51.5 in March, from 50.3 in February, and was solidly above the 50-point breakeven market. The mainland economy continues to churn despite some fear that deleveraging and regulation could hurt output. Improving PMIs imply better GDP print and provide regulators with more wiggle room on the regulatory and deleveraging front. It also clears up any lingering debate about last month's PMI drop due to Lunar New Year effect.

The Chinese Yuan

The inclusion of Chinese government bonds in the Bloomberg Barclays Global Aggregate Index is a huge win and with at least two more index announcements likely this year, this will bode well for capital inflow and will act as a stable anchor for domestic bond markets.

And within the context of the trade negotiations it is thought that a weaker US dollar will be an active ingredient to the process, so local traders continue to buy the yuan.

The Malaysian Ringgit

The easing of North Korea tensions is providing a positive backdrop to an already buoyant domestic Malaysian landscape and is offering a massive boost to local currency markets, including the ringgit. Malaysia had severed trading ties with North Korea over the brazen assassination of Kim Jong-Nam at Kuala Lumpur International Airport in February 2017, but may be more willing to offer concession now. Strategically, it makes sense as Malaysia will pick up another local trading partner.

On the market side of the equation, The ringgit remains buoyant on the back of stable Malay bond markets. But with Malay election the next local headwind, we could see a slow-down in offshore flows which are most typical ahead of any regional elections, but markets are expected to remain stable within current ranges.

Oil prices continue to trade firm, and with regional sentiment improving, the ringgit should continue to benefit from both strong domestic and external factors.