The Heat Is On (Again)

By Stephen Innes

Just when you thought it was safe to go back in the water, President Trump orders USTR to consider $100 billion in additional tariffs, confirming the view that trade war rhetoric is unlikely to leave the picture anytime soon.

Equity markets held a decent bid overnight with risk sentiment bouncing higher, on the back of the recent trade rhetoric suggesting both camps are incredibly motivated to contain trade tension for fear of a global market meltdown. But this morning's headlines will question that view. But at a minimum, investors should start wondering why the US administration's soothsayers are sending out contradictory signals. I fear there are some awful actors in play on this political stage.

With the seismic shifts in sentiment this week the last thing this market needs is more confusion. The latest in a line of bombastic Trump headlines now suggests it will take more than a kind week to sort this trade war issue out.

However, the hyper-volatility we've been warning about all year could be just around the corner.

We're out of the fire and into the frying pan for stock markets as investors have forgotten about the Fed, who could be the market's biggest universal foe. So besides an unlikely full-blown trade war, the real risk facing capital markets is a more aggressive Fed, and tonight's average hourly wages data could provide that inflation fodder for reigniting the four rate hikes debate. But let's not forget that delicate issue when QE gets pulled back, there's no accurate roadmap to navigate that bumpy road.

Risk aversion plays aside, with a nudge from tonight's payrolls data it could put the finishing touches on a remarkable week for the dollar. Of course, position squaring into NFP could be the culprit for the dollar's continued revival, but economic data has topped out elsewhere including China and the eurozone. So with the US economy expected to shine brightly in Q2 and 3, perhaps some long-held negative dollar views could fall under pressure during the next few weeks.

I've been fielding a lot of client questions this week on how they should trade extreme sell-off, followed by an equally stupendous rally. "Carefully!" my seat is feeling every bump and bounce as trade concerns still bubble under the surface all the while; President Trump's instability alone keeps me awake at night!!

Oil Markets

Bullish signals abound to end the week, until the latest headline that is! The most recent rumblings from President Trump have seen oil prices fall convincingly, but given the supporting narrative, it should attract some dip buyers.

This week's US inventory data points to strong demand on the back of buoyant US exports. US oil inventories remain a volatile gauge, but they still provide a good litmus test for the short-term application.

The real surprise was Saudi Arabia lifting oil prices for Asian buyers overnight which certainly put a significant bid in the futures markets.

Gold Markets

A few negative kickers for gold prices; as US-China trade wars tension ease, US 10-Year yields perked up above 2.83, strengthening the dollar and denting gold's appeal. But haven demand has only reduced and not reversed as the markets are never out of the woods with so many potential risk disruptors still in play. However, there are the usual precautionary position adjustments in the game ahead of the NFP, as a substantial employment number and wage growth would see the market quickly price in a more aggressive Fed policy (4 rate hikes) and push gold prices lower.

Currency markets

The Japanese Yen

As the trade fracas diminishes, equities continue their recovery and USDJPY moves higher on risk appeal. So the opposite holds true for this morning's Trump headline. But USD bears still have the NFP to navigate which could slow the re-emerging risk off USDJPY downtrend. The dollar has shown some real moxy this week, and a stronger AHE print could leave more than a few tongues wagging later tonight.

The Euro

Nearing the soggy bottom 1.2220 level after the market has spent weeks building up long EURUSD inventory could be a real test of conviction.

The Malaysian Ringgit

The MYR remains quiet ahead of a pending election announcement and US NFP. Trade war rhetoric is framing regional risk sentiment, and local traders, as is so often the case heading into NFP, are increasingly nervous about a more aggressive shift from the Fed. Foreign inflows are expected to fall to a trickle as the election nears, where investors will probably only trade the edges of the current MYR ranges. With headlines risk abounding, the safest place appears on the sidelines today as we head into tonight's NFP.